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XTbe  XDlniversltp  ot  Cbtcago 

FOUNDED   BY  JOHN   D.    ROCKEFELLER 


AN  EXPOSITION  IN  OUTLINE  OF  THE 
RELATION  OF  CERTAIN  ECONOMIC 
PRINCIPLES  TO  SOCIAL  READJUSTMENT 


AN  INQUIRY  INTO  THE  MOST  GENERAL  PRINCIPLES  OF  PRODUCTION 
AND  DISTRIBUTION  AND  THE  NATURE  OF  VALUE  FOR  THE  PURPOSE 
OF  ASCERTAINING  THE  POSSIBILITY  OF  EFFECTING  BY  SOCIAL  ACTION 
A  MORE  EQUITABLE   DISTRIBUTION   OF  WEALTH  THAN   NOW  PREVAILS 


A    DISSERTATION     SUBMITTED    TO    THE     FACULTIES    OF    THE    GRADUATE 

SCHOOLS  OF  ARTS,  LITERATURE,  AND  SCIENCE,  IN  CANDIDACY 

FOR    THE    DEGREE    OF    DOCTOR    OF    PHILOSOPHY 

DEPARTMENT    OF    SOCIOLOGY 


By  FREDERIC  W.   SANDERS 


CHICAGO 

Ube  lUnivcveit^  ot  CbicaQO  press 

1898 


<^1^^ 

'% 


CONTENTS. 

Introduction        -        - -  i 

PART  L— ECONOMIC  THEORY. 

1.  The  Factors  in  Production 7 

2.  The  Laws  of  Distribution       -         -         - 8 

A.  Rent    -         -         -         - I2 

B.  Wages      -         -         -      .  -         -         -         -         -         -         -         -         -  20 

C.  Gross  Interest      ..--.---.--23 

3.  Value              -         - -         -         -  23 

A.  Value  in  General          -         -          -         - -  23 

B.  Value  in  Relation  to  True  Interest    -------  30 

C.  Summary  as  to  Value    ----------  38 

PART  II.— APPLICATION. 

1.  What  is  meant  by  an  Equitable  Distribution             .         -         -         .         .  41 

2.  The  Standard  of  Living  the  Key  to  the  Problem  of  Distribution          -         -  51 

3.  Land  Nationalization  Economically  Justified  as  a  Means  of  Raising  the 

Standard  of  Living  and  Effecting  a  More  Equitable  Distribution         -  57 

Appendix  —  Titles  of  Works  to  Which  Reference  is  Made.           -         -  '      -  63 


1?.1148 


INTRODUCTION. 

The  connection  between  the  economic  and  the  sociological  part  of 
this  dissertation  requires  a  word  of  explanation.  If  there  were  perfect 
agreement  as  to  the  true  principles  of  economics,  it  would  only  be 
necessary  for  the  writer  to  postulate  those  principles,  and  then  show 
that  the  possibility  of  effecting,  by  social  action,  a  more  equitable  dis- 
tribution of  wealth  than  now  prevails,  was  in  accord  with  them,  illustrat- 
ing his  thought  by  reference  to  some  special  line  or  lines  of  social 
readjustment.  The  fact  being,  however,  that  there  is  not  entire  agree- 
ment as  to  the  true  principles  of  economic  theory,  it  becomes  neces- 
sary, for  one  who  would  appeal  to  such  principles  in  support  of  his 
social  doctrine,  to  set  forth  that  which  he  regards  as  the  true  economic 
theory.  The  outline  of  economic  theory  thus  required,  the  writer  has 
endeavored  to  keep  within  the  bounds  which  its  subordination  to  the 
purpose  of  the  essay  requires  ;  and  he  has  accordingly  confined  himself 
in  the  main  to  such  a  brief  statement  of  the  most  general  principles  as 
should  be  consistent  with  an  adequately  suggestive  presentation  of  the 
point  of  view.  That  he  should  be  entirely  successful  in  giving  to  each 
element  of  economic  theory  to  which  reference  is  made  its  due  promi- 
nence, and  no  more,  is  hardly  to  be  expected.  In  large  measure  he 
believes  his  economic  theory  to  be  in  accord  with  that  generally  accepted 
by  economists,  and  he  has  therefore  felt  at  liberty  to  pass  over  the  field 
very  lightly,  and  to  present  in  briefest  outline  so  much  of  it  as  it 
seemed  necessary  to  present  at  all  ;  but  at  certain  points  —  as  in  his 
explanation  of  interest,  which  differs  somewhat  from  that  of  any  other 
writer — he  has  felt  obliged  to  speak  with  greater  fullness. 

If  interest  is  to  lie  justified,  its  relation  to  capital  and  to  rent  and 
wages  must  be  understood.  The  most  adequate,  and  at  the  same  time 
the  simplest,  explanation  of  interest,  it  seems  to  the  writer,  has  been 


2  INTRODUCTION 

overlooked :  and  the  explanations  commonly  offered  have  been  so 
unsatisfactory  as  to  lend  color  to  the  socialist's  contention  that  interest 
is  necessarily  unrighteous.  According  to  the  writer's  view,  the  true 
explanation  rests  upon  the  theory  of  value ;  and  he  has  therefore  dis- 
cussed that  theory  at  considerable  length,  not  because  he  regards  the 
theory  itself  as  at  this  day  an  open  question,  but  because  its  appli- 
cations have  not  been  sufficiently  considered,  and  because  he  believed 
that  by  concentrating  attention  upon  the  theory  he  might  succeed  in 
making  the  corollaries  derivable  therefrom  more  evident. 

The  justification  of  interest  supported  by  the  theory  here  presented 
gives  us  negative  assistance  in  determining  the  direction  of  social  effort 
for  reform,  by  affording  us  reason  for  not  resorting  to  certain  measures 
usually  advocated  by  socialists  for  effecting  a  more  equitable  distribution. 
If,  furthermore,  there  is  an  independent  element  in  the  determination 
of  wages,  over  and  above  the  relation  of  labor  to  the  other  factors  in 
production ;  and  if  there  is  a  similar  determining  element  in  the  case 
of  rent ;  while  there  is  no  such  independent  element  in  the  determi- 
nation of  interest,  the  latter  depending  wholly  upon  the  relation  of 
capital  to  the  other  two  factors  in  production,  —  then  in  a  search  for 
means  of  effecting  a  more  equitable  distribution  of  wealth  we  may  con- 
fine our  attention  to  wages  and  rent,  in  the  confidence  that  interest  will 
be  determined  by  these  two.  If,  again,  the  independent  determining 
factor  in  the  case  of  rent  is  not  only  less  potent  than  the  correspond- 
ing special  factor  in  the  determination  of  wages,  but  is  the  result  of  a 
more  or  less  arbitrary  human  institution  (private  property  in  land) 
which  maybe  done  away  with,  then  the  element  of  primary  importance 
in  the  determination  of  all  three  distributive  shares — interest,  rent,  and 
wages — is  the  independent  factor  in  the  determination  of  wages  (to 
wit,  the  standard  of  living).  If,  finally  that  which  does  away  with  the 
independent  element  in  the  determination  of  rent  (land  nationaliza- 
tion), and  leaves  the  special  element  in  the  determination  of  wages  in 
possession  of  the  field,  can  at  the  same  time  be  shown  to  be  highly 
efficient  in  raising  the  standard  of  living,  then  this  land  nationalization, 


INTRODLCTION  3 

if  desirable  in  itsel'f,  is  doubly  commended  as  a  measure  of  reform,  and 
may  well  be  considered  as  among  the  chief  means  of  raising  the  stand- 
ard of  living.  To  indicate  the  line  of  argument  establishing  what  is 
put  hypothetically  in  this  paragraph  is  the  purpose  of  this  dissertation. 
The  necessity  of  indicating  his  whole  economic  theory  so  far  as  it 
bears  upon  the  sociological  doctrines  here  considered,  has,  as  the 
writer  has  already  intimated,  seemed  to  him  to  forbid  elaboration  in 
the  presentation  of  his  theory  —  even  of  so  much  of  it  as  is  original. 
It  should  therefore  be  borne  in  mind  that  this  essay  in  not  intended 
as  an  elaborate  argument,  but  as  the  presentation  of  a  somewhat  new 
point  of  view  as  to  the  relation  of  economic  principles  to  certain  doc- 
trines which  belong  in  the  field  of  sociology  —  the  line  of  argument  in 
support  of  which  is  indicated  but  not  worked  out  exhaustively. 


PART    I 

ECONOMIC  THEORY 


ECONOMIC  THEORY. 


I.    THE  FACTORS  IN  PRODUCTION. 

Land  2iiid  labor^  are  the  primary  factors  which  unite  in  the  produc- 
tion of  wealth. 

Land  signifies  all  the  matter  in  the  universe,  with  all  the  forces  and 
opportunities  embodied  therein,  outside  of  man  himself. 

Labor  is  all  human  exertion. 

Generally  speaking,  we  may  say  that  to  land  all  wealth  is  indebted 
for  its  material,  and  to  labor  for  its  form  (or  position) ;  that  land  is 
natural  opportunity,  and  labor  is  human  activity  applied  thereto. 

Production  in  its  simplest  form,  and  all  (economic)  production  in 
an  ultimate  analysis,  consists  in  the  application  of  human  activity  to 
natural  opportunity;  a  change  in  the  relations  of  the  parts  of  the 
material  universe  effected  by  human  exertion ;  a  movement  of  matter 
by  man  ;    that  is,  in  fine,  a  combination  of  land  and  labor. 

The  product  is  called  wealth.  Wealth,  then,  is  composed  of  land 
and  labor,  that  is,  it  is  the  product  of  this  combination.  According  as 
we  regard  it  from  the  natural  (using  that  term  in  contradistinction  to, 
and  as  exclusive  of,  human)  or  from  the  human  standpoint,  we  may 

*  Perhaps  it  would  be  more  accurate  to  say  "labor  power,"  or  "human  power," 
since  in  strictness  it  may  be  said  that  labor  does  not  exist  apart  from  land.  Labor  is 
human  exertion,  not  mere  capacity  for  exertion ;  and  exertion  is  impossible  without 
something  upon  which  to  exert  itself  and  some  place  in  which  to  exert  itself.  It  is, 
therefore,  true  that  labor  is  human-activity-applied-upon-land,  so  that  land  may  in  a 
sense  be  regarded  as  a  necessary  part  of  the  concept  labor.  From  this  point  of  view 
no  two  of  the  three  entities,  land,  labor,  and  capital,  are  coordinate  and  distinct 
factors  in  production ;  but  the  first  (land)  is  the  condition  of  the  second  (labor),  a 
complete  conception  of  which  necessarily  includes  the  first ;  and  similarly  the  second 
(labor)  is  the  condition  of  the  third  (capital),  into  a  complete  conception  of  which  the 
second  (and  with  it,  of  course,  the  first)  must  enter.  But  this  is  a  refinement  into 
which  I  do  not  think  we  need  go  in  the  discussion  which  is  to  follow,  and  I  shall  pro- 
ceed upon  the  assumption  that  it  is  generally  unnecessary  to  distinguish  in  terms 
between  labor  and  labor-power. 

7 


8  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

say  that  wealth  is  matter  which  has  been  operated  upon  by  man,  or 
that  it  is  labor  embodied  in  matter." 

It  is  obvious  that  the  labor  and  land  which  are  combined  in,  or 
fused  into,  wealth,  may  be  further  combined  with  other  labor  and 
other  land  and  other  combinations  of  labor  and  land,  the  result  of 
which  will  be  a  new  form  of  wealth.  Wealth  thus  combined  with  labor 
or  with  labor  and  land,  or  with  labor  and  other  wealth,  to  produce 
more  wealth  or  a  different  kind  of  wealth,  is  called  capital,''  and  the 
process  is  called  capitalistic  production.  Capitalistic  production,  then, 
differs  from  the  simplest  forms  of  production  first  described,  in  that 
while  in  the  simplest  forms  of  production  there  are  but  two  factors, 
land  and  labor,  in  capitalistic  production  (which  is  the  ordinary  form 
of  production),  there  are  three  factors,  land,  labor,  and  capital.  But, 
inasmuch  as  capital  is  itself  the  product  of  land  and  labor,  it  will  also 
be  seen  that  capitalistic  production  may,  in  the  last  analysis,  be 
described  as  the  combination  of  land  and  labor. 

II.    THE  LAWS  OF  DISTRIBUTION. 

From  the  standpoint  of  distribution  it  was  at  one  time  common  to 
speak  of  the  division  of  wealth  into  rent,  the  share  of  the  landlord, 
wages,  the  share  of  the  laborer,  and  profit,  the  earnings  of  the  cap- 
italist,—  this  because  the  entrepreneur  generally  provided  the  capital, 
and  it  was  hence  assumed  that  his  profit  was  earned  qua  capitalist.  As 
the  functions  of  entrepreneur  and  capitalist  have  come  more  and  more 

*It  will  be  observed  that  this  definition  of  wealth  does  not  include  land  —  i.  e., 
free  land.  Of  course,  inasmuch  as  wealth  is  the  product  of  land  and  labor,  the  matter 
of  all  wealth  is  land  ;  but  free  land,  land  unaffected  by  human  labor,  is  not  wealth,  in 
our  sense,  however  valuable  it  may  be.  Land,  however,  as  well  as  wealth,  is  an  eco- 
nomic good. 

^  Many  economists,  adopting  a  definition  of  capital  very  similar  to  that  here 
given,  so  interpret  the  definition  as  to  make  capital  a  factor  in  all,  even  the  simplest 
conceivable  forms  of  production.  What  I  regard  as  a  most  important  distinctive  ele- 
ment in  labor  —  that  it  is  the  activity  of  a  living  being  —  is,  under  this  conception, 
practically  eliminated,  and  the  laborer  is  regarded  in  the  same  way  as  a  machine,  an 
engine,  which  must  be  provided  with  fuel  from  hour  to  hour  in  order  that  it  may  play 
its  part  in  production.  As  such  fuel  would  be  capital,  so  the  subsistence-wealth  which 
is  used  to  keep  the  laborer  alive  is  regarded  as  capital.  I  cannot  state  here  the 
reasons  which  lead  me  to  reject  this  interpretation  of  the  meaning  of  capital  (despite 
such  advantages  as  it  indubitably  has),  and  to  prefer  one  which  permits  us  to  conceive 
of  non-capitalistic  production;  the  discussion  would  carry  us  too  far.     One  of  the 


or 


THE  LAWS  OF  DISTRIBUTION  9 

to  be  exercised  by  distinct  individuals,  there  has  followed  a  clearer 
recognition  of  the  difference  between  profit  and  interest,  the  latter  of 
which  is  spoken  of  as  the  reward  of  the  capitalist,  and  the  former  as  the 
reward  of  the  entrepreneur.  For  some  purposes  it  is  important  to 
recognize  the  distinct  function  of  the  entrepreneur  in  production  as 
different  from  that  of  the  common  laborer,  as  well  as  from  that  of  the 
capitalist  or  the  landlord ;  but  in  the  scheme  of  production  set  forth  in 
the  preceding  chapter  there  is  but  one  place  for  the  entrepreneur,  and 
that  is  in  the  ranks  of  labor ;  and  as  it  is  not  necessary  for  our  purpose 
to  go  into  the  details  of  the  division  of  labor,  and  as  it  is  important  to 
keep  clearly  before  the  mind  the  fundamental  distinction  between  labor 
and  land  (and  capital,  the  product  of  the  two),  I  shall  not  in  the  general 
discussion  which  is  to  follow  distinguish  between  entrepreneur  activ- 
ity, other  forms  of  highly  skilled  labor,  and  the  common  labor  which 
requires  little  skill.'     Including  entrepreneur  activity  with  labor,  then, 

reasons,  however, —  the  difficulty  of  consistently  carrying  out  the  theory  here  referred 
to, —  may  be  suggested  by  the  inquiry  :  What  part  of  the  ^20,000,  say,  which  a  rich 
man  managing  a  large  business  annually  sets  apart  for  household  and  personal 
expenses,  is  capital  ?  Certainly  much  of  it,  on  the  theory  referred  to,  since  it  keeps 
him  in  excellent  condition,  contributes  to  the  efficiency  of  his  labor,  and  so  "  assists  in 
production."  But  is  wealth  thus  expended  actually  reckoned  as  capital  or  as  wealth 
withdrawn  from  "  production  "  and  devoted  to  "  consumption  "  ? 

^  At  this  point  it  may  be  proper  to  suggest  the  considerations  which  seem  to  me 
to  dispose  of  the  notion — which  lurks  in  the  minds  of  so  many — that  "profit,"  in  the 
sense  of  surplus  value,  or  excess  of  value  of  the  product  over  the  price  originally  paid 
for  the  several  units  of  land,  labor  and  capital  employed  in  producing  it,  belongs  by 
right  wholly  or  in  the  main  to  the  entrepreneur.  Although,  as  we  have  remarked  in 
the  text,  there  are  purposes  for  which  it  is  advisable  and  convenient  to  consider  the 
exercise  of  entrepreneur  ability  apart  from  that  of  common  wage  labor,  it  cannot  be 
too  strongly  insisted  that  the  basis  is  the  same  in  each  —  the  reward  of  entrepreneur 
labor,  however,  like  that  of  all  forms  of  skilled  labor,  containing  a  larger  proportion 
of  "  scarcity  rent "  than  that  of  the  lower  forms  of  labor.  The  entrepreneur  is  a 
skilled  laborer.  As  such  his  service  rightly  commands  a  higher  wage  than  that  of  the 
common,  unskilled  laborer.  Further,  as  the  higher  we  go  in  skill  the  less  exactly  alike 
are  the  abilities,  the  serviceablenesses,  of  laborers,  the  more  difficult  it  is  to  determine 
either  the  average  or  the  minimum  value  of  these  higher  forms  of  labor.  Statisticians 
distrust  averages  drawn  from  few  individuals ;  and  the  fewness  of  the  individuals 
constituting  the  classes  of  skilled  labor  is  greater  than  it  might  at  first  seem,  from  the 
fact  that  although  we  may  be  reasonably  confident  that  the  skill  of  different  men  is  of 
the  same  rank  or  grade,  we  cannot  equate  them  directly,  because,  being  different  in 
kind,  they  do  not  come  into  direct  competition.  The  skill  of  a  blacksmith  and  that  of 
a  cabinet-maker  may  be  like   in  degree,  but,  not  being   like  in  kind,  it  is  difficult  to 


lo  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

we  have,  as  before,  land,  labor,  and  capital  as  the  factors  of  produc- 
tion ;  and  it  is  common  to  speak  of  rent,  wages,  and  interest  as  the 
respective  shares  of  the  product  going  to  the  owners  of  the  land,  the 
labor,  and  the  capital.  Before  passing  to  the  discussion  of  these  terms, 
however,  we  must  notice  that  (true,  or  net)  interest  is  essentially  differ- 
ent from  rent  and  wages,  in  that  while  rent  is  the  whole  return  for  the 
use  of  land,  and  wages  the  whole  return  for  the  expenditure  of  labor, 
(true)  interest  is  but  a  part  of  the  return  made  for  the  capital  employed. 
The  cost  price  of  all  the  capital  consumed  is  ordinarily  returned,  and 
the  interest  is  an  addition  thereto,  a  surplus  thereupon.  The  nature 
of  this  surplus  we  shall  consider  in  our  discussion  of  value.  For  the 
present  we  need  only  notice  that  the  payment  of  rent,  wages,  and 
(true)  interest  does  not  exhaust  the  product  of  land,  labor,  and  capital, 
but  that  the  share  of  ^  the  capitalist  is  not  (true)  interest,  but  the  amount 
(to  use  the  terminology  of  commercial  arithmetic) ;  that  is  to  say, 
(true)  interest  is  but  a  part  of  the  capitalist's  return,  he  never  gets  true, 
or  net,  interest  without  first  getting  the  full  equivalent  of  the  capital 
used  up  in  the  productive  process.  Although  the  term  gross  interest^ 
used  to  describe  this  "amount"  of  the  capitalist's  return,  consisting  of 
the  equivalent  of  the  original  capital  consumed  plus  the  (true)  interest 

classify  the  iron-worker  and  the  wood-worker  together.  Now,  this  difficulty,  which 
exists  in  the  more  ordinary  forms  of  skilled  labor,  increases  rapidly  as  we  get  to  the 
higher  forms  of  skill,  where  the  members  are  absolutely  as  well  as  relatively  small. 
That  which  distinguishes  entrepeneurs  as  a  class  is  administrative,  or  "  executive," 
ability;  but  this  is  shared  in  a  measure  by  their  superintendents  and  foremen,  and  cer- 
tainly by  politicians,  military  and  naval  officers,  educational  directors,  and  many  other 
kinds  of  "  non-productive  "  administrators,  who  often  work  all  their  lives  for  small 
salaries,  their  love  of  and  interest  in  the  particular  work  in  which  they  are  engaged 
being  greater  than  the  love  of  money,  or  of  wealth  in  the  abstract.  Often,  I  think,  it 
is  the  latter  love  (which  is  sometimes  a  negative,  rather  than  a  positive,  quality;  being 
due  to  the  absence  of  any  natural  bent,  or  of  such  culture  as  might  have  awakened 
interest  in  some  specific  field  of  work  for  its  own  sake)  which  makes  an  entre- 
preneur of  a  man  of  good  but  not  extraordinary  administrative  ability.  At  other 
times,  it  is  the  direct  control  of  capital  which,  combined  with  good  executive  ability, 
determines  a  man  for  the  vocation  of  entrepreneur.  The  third  class  of  entrepreneurs 
is  composed  of  men  who  are  such  because  it  has  chanced  to  them  to  have  some  special 
training  or  experience  in  a  certain  line  of  work,  which  makes  them  the  fit  persons 
(having  that  degree  of  administrative  ability  which  must  be  the  possession  of  all  of  the 
entrepreneur  class,  but  which  is  not  peculiar  to  them)  to  conduct  certain  enterprises. 
Finally,  there  is  that  numerically  small  but  most  important  class  of  entrepreneurs  who 
are  such,  not  as  is  the  case  with  most  entrepreneurs,  because,  having  a  fair  degree  of 


THE  LAWS  OF  DISTRIBUTION  II 

thereupon,  is  objectionable  in  that  it  obscures  the  fact  that  it  includes 
the  base  upon  which  the  rate  of  net,  or  true,  interest  is  computed,  yet 
it  has  the  advantage  of  brevity,  and  also  of  verbally  justifying  the  com- 
mon division  of  the  product  of  land,  labor,  and  capital  into  the  dis- 
tributive shares,  rent,  wages,  and  interest  —  this  division  being  an 
exhaustive  one,  if  by  interest  we  understand  gross  interest. 

For  brevity  I  have  spoken  of  rent  in  the  last  paragraph  as  though 
it  were  an  unambiguous  term,  descriptive  of  the  payment  made  to  the 
landlord  for  the  use  of  land.  But  it  is  not  unambiguous,  and  we  may 
not  safely  use  any  of  these  terms  in  explaining  the  distribution  of 
wealth  until  we  have  carefully  examined  and  distinctly  defined  them. 
I  shall  therefore  now  proceed  to  a  more  particular  consideration  of 
rent,  wages,  and  interest ;  in  which  I  shall  endeavor  to  make  clear  the 
meanings  of  the  terms,  and  the  mutual  relations  of  the  phenomena 
described  by  them. 

administrative  ability,  they  were  directed  by  other  circumstances  —  love  of  wealth  as 
such,  lack  of  any  controlling  intellectual  or  emotional  bent,  possession  of  capital,  or 
special  training  in  some  particular  branch  of  work  —  to  entrepreneur  activity,  but 
because  they  are  the  possessors  of  extraordinary  administrative  ability,  which  must  find 
an  outlet,  and  finds  it  most  suitably  in  the  management  and  direction  of  great  indus- 
trial enterprises. 

So  much  for  the  nature  of  entrepreneur  activity  in  general.  The  point  to  which 
I  wish  to  call  especial  attention  is  that,  while  the  relative  productiveness  of  industries 
depends  in  a  measure  upon  the  greater  or  less  ability  of  the  entrepreneurs  at  the  head 
of  them,  it  depends  no  less  upon  the  amount  of  capital  and  labor  involved  (and  the 
control  of  land,  which  it  is  not  necessary  to  consider  at  this  point).  That  is  to  say, 
the  greatest  conceivable  entrepreneur  activity,  if  it  could  obtain  but  a  dozen  laborers 
and  a  few  thousand  dollars  worth  of  capital  to  work  with,  could  make  but  a  small 
surplus  value,  as  compared  not  only  with  that  which  the  possessor  of  ability  could 
secure  if  he  had  the  cooperation  of  a  large  capital  and  a  large  body  of  laborers,  but 
also  with  the  surplus  secured  by  an  entrepreneur  greatly  his  inferior  in  ability  working 
with  a  large  force  of  labor  and  a  great  amount  of  capital.  In  other  words,  while 
there  must  be  sufficient  entrepreneur  ability  in  the  management  (whether  this  manage- 
ment be  the  work  of  one  man  or  of  several)  of  any  given  enterprise,  whatever  be  the 
size  of  the  enterprise,  to  make  it  go ;  and  while  the  productivity  of  the  enterprise  will 
have  a  tendency  to  vary  with  the  degree  of  this  entrepreneur  ability  (as  it  will  have  a 
tendency  to  vary  with  the  proficiency  of  all  other  kinds  of  labor  employed  in  it),  yet 
granted  a  reasonable  proficiency  in  his  particular  kind  of  labor  on  the  part  of  the 
entrepreneur  and  on  the  part  of  each  of  the  otherlaborers  engaged  in  the  enterprise,  the 
product  will  vary  directly  with  the  magnitude  of  the  combination  of  industrial  factors. 
If  this  be  true,  then  "  profit,"  in  the  sense  above  defined,  does  not  rightfully  belong 
wholly  to  the  entrepreneur.     The  entrepreneur  may  have  exerted  just  as  much  ability 


1 2  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

A,     RENT.' 

Without  dwelling  upon  the  popular  use  of  the  word  rent,  in  the 
sense  of  income  received  on  account  of  the  use  of  anything  —  as  in 
the  expression,  "the  rent  of  a  piano,"  "interest  is  the  rent  of  capital,"* 
etc. — we  observe  that  the  several  uses  of  this  term  in  economic  dis- 
cussion, although  having  much  in  common,  are  sufficiently  distinct  to 
call  for  attention. 

I.  Perhaps  the  most  general  sense  in  which  the  word  rent  is  used 
is  that  which  expresses  the  return  from,  or  payment  received  on  account 
of,  an  advantage  in  the  production  of  wealth  arising  from  the  limited 
quantity,  and  hence  the  "scarcity  value,"  of  the  particular  kind  of  that 
factor  in  production  to  which  the  rent  is  attributed.  In  this  sense  of 
the  term,  any  one  of  the  three  factors  in  production  may  command  a 
rent.  Not  only  will  land  above  the  margin  of  use  command  such  a 
rent,  but  so  also  will  fixed  ^^///«/ ( "capital  goods")  which  for  any 
reason  cannot  be  freely  duplicated  to  meet  the  demand,  whether  this 
be  by  reason  of  a  patent  whose  owner  can  control  at  will  the  number 
of  machines  made ;  or  the  result  of  a  sudden  change  in  the  direction 
of  industrial  activity,  which  few  producers  are  prepared  to  meet,  in 
which  case  the  owners  of  the  particular  kinds  of  capital  adapted  to 
meet  the  demand  will  derive  a  rent  therefrom  until  other  capital  can 
be  changed  into  the  desired  form  ;  or  whether  the  peculiar  advantage 
accruing  to  the  capital  in  question  be  the  result  of  the  fact  that  such 
an  enormous  amount  of  capital   and  so   much  time  must  be  used  to 

(and  may  have  worked  harder)  when  he  was  working  with  forty-nine  other  men  and 
^50,000  worth  of  capital,  as  when  he  is  working  with  fifty-nine  other  men  and  $60,000 
worth  of  capital ;  yet  the  product  is  not  20  per  cent.,  but  may  be  30  per  cent,  or  even 
50  per  cent,  greater.  It  is  evident,  therefore,  that,  in  case  the  value  is  30  per  cent, 
greater,  the  10  per  cent,  of  this  30  per  cent,  increase,  which  is  an  absolute  increase,  is 
not  exclusively  the  product  of  the  services  of  the  entrepreneur.  It  is  due  to  the  fact 
that  the  serviceableness  of  every  one  of  the  units  of  the  factors  of  production  is  greater 
in  a  large  combination  than  in  a  small  one. 

'  In  preparing  this  section,  as  in  the  work  at  large,  I  have  given  my  attention 
chiefly  to  the  more  recent  writers.  I  have  compared  the  views  of  Marshall,  Nicholson, 
Gide,  Macvane,  Walker,  Cairnes,  Mill,  Laughlin,  and  George,  and  several  less  known 
writers,  and  have  availed  myself  of  C.  W.  Macfarlane's  monograph  on  "  The  History 
of  the  General  Doctrine  of  Rent  in  German  Economics." 

"  These  uses  of  the  term  are  in  accord  with  Rodbertus's  definition  of  rent  as  "  all 
income  obtained  without  personal  exertion  solely  in  virtue  of  possession." — Sociale 
Frage,  p.  32. 

t 


THE  LAWS  OF  DISTRIBUTION  13 

make  another  plant  of  the  same  kind,  that  others  cannot  afford  to 
duplicate  the  plant  or  plants  then  in  the  field.  In  this  sense,  the  word 
rent  is  even  applied  to  labor^  as  when  a  great  and  sudden  increase  in 
the  demand  for  some  particular  kind  of  skilled  labor  enables  those 
then  fitted  for  it,  and  those  who  can  promptly  adapt  themselves  to  it, 
to  command  an  extra  compensation  beyond  that  which  laborers  of 
equal  general  ability,  but  whose  skill  has  been  cultivated  in  a  different 
direction,  can  earn.  In  this  sense,  too,  rent  is  the  chief  element  in  the 
wages  of  genius  or  extraordinary  talent.  The  difference  between  the 
reward  of  "ability,"  as  Mr.  W.  H.  Mallock  uses  the  term,  and  the 
wages  of  (common)  "labor"  is  in  this  sense  a  rent.^  For  lack  of  a 
better  term,  we  may  designate  this  conception  of  rent  as  Scarcity  Rent. 

2.  Approximating  this  use  of  the  term  are  the  less  extensive  uses 
of  it  which  would  exclude  those  of  the  cases  cited  above  in  which  the 
advantage  was  merely  temporary,  and  which  would  exclude  all  cases 
which  might  properly  be  denominated  monopolies,  and  all  in  which 
the  extra  compensation  enters  into  the  cost  price  of  the  articles  pro- 
duced, restricting  the  application  of  the  word  rent  to  the  measure  of 
the  differential  advantage  which  one  producer  has  over  another  who 
produces  the  same  kind  of  thing.  The  agricultural  rent  of  the 
Ricardians  belongs  in  this  group.  For  convenience  we  shall  apply  to 
the  conception  of  rent  given  in  this  paragraph  the  term  Marginal 
Rent, 

3.  Whether  or  not  their  theories  be  broader,  English  economists 
have  in  practice  generally  confined  their  use  of  the  term  rent  to  land 
rents,  and  this  fact  has  encouraged  the  last  use  of  the  term  rent  to 
which  I  shall  refer,  to-wit — the  return  for  the  use  of  land;  payment 

*  Although  for  purposes  of  economic  discussion  we  distinguish  sharply  between 
"nature  "  and  "man  "  —  between  land  and  labor,  or,  more  accurately  perhaps,  labor- 
power  —  it  will  do  no  harm  to  remember  that  in  the  larger  sense  of  the  terms  "nature" 
and  "natural,"  man  is  a  part  of  nature  and  human  efficiency  is  one  particular  form  of 
natural  power.  Looking  at  nature  in  this  large  way,  we  understand  how  the  same 
term  should  be  applied  to  the  reward  for  superiority  in  human  productive  power  that 
is  applied  to  the  reward  for  superiority  in  natural  (i.  e.,  land)  productive  power.  The 
fertile  land  that  yields  a  large  agricultural  rent  as  compared  with  low  rent  land, 
does  so  because  it  is  more  richly  endowed  by  nature  ;  and  the  man  of  extraordinary 
physical  strength  or  great  mental  endowment  wherewith  he  gets  a  much  greater  wage 
than  his  fellows,  gets  the  difference  in  wage  because  he  is  more  richly  endowed  by 
nature ;  and  accordingly  this  difference  is  sometimes  called  a  labor  rent,  as  the  other 
is  a  land  rent. 


14  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

for  access  to  natural  opportunity ;  the  share  of  the  product  resulting 
from  the  application  of  labor  or  of  labor  and  capital  to  land  —  that  is, 
from  the  combination  of  land  with  labor  or  with  labor  and  capital  — 
which  goes  to  him  who  owns  the  land  as  a  return  for  it,s  contribution 
to  the  result.  This  conception  of  rent '  I  shall  designate  as  Land  Rent  or 
simply  as  Rent. 

This  is  the  sense  in  which  I  shall  use  the  term  in  this  dissertation. 
I  regard  it  as  essential  to  a  right  understanding  of  the  problem  of  dis- 
tribution that  the  fundamental  difference  between  land  and  labor  and 
their  product  wealth  (including  capital)  be  clearly  apprehended  and 
constantly  kept  in  mind.  And  because  of  this  conviction,  it  seems  to 
me  much  more  important  for  the  purpose  in  hand  to  have  a  term  which 
shall  strictly  and  exclusively  refer  to  the  return  which  goes  to  the  land- 
lord as  landlord  that  it  is  to  dwell  upon  the  conception  of  marginal 
rent  and  its  (  negative)  relation  to  cost. 

It  will  be  observed  that  the  conception  of  rent  here  adopted  differs 
from  the  Ricardian  conception  of  land  rent  (which,  however,  it 
includes),  in  that  the  latter  is  essentially  differential^  while  the  former 

*  Nicholson,  "  Principles  of  Political  Economy,"  vol.  i,  page  409,  and  Cairnes, 
"  Political  Economy :  Its  Character  and  Logical  Method,"  lecture  viii,  sec.  3,  refer 
expressely  to  this  use  of  the  term  rent,  although  the  latter  questions  whether  it  should 
be  called  "economic  rent." 

^  For  convenience  in  the  explication  of  the  Ricardian  theory  of  rent,  economists 
are  accustomed  to  assume  that  there  is  land  in  use  in  civilized  countries  which  does 
not  pay  rent,  and  to  say  that  the  lowest  rent  paid  is  not  that  for  the  poorest  land  in 
use,  but  that  paid  for  the  next  grade  above  the  poorest  land  in  use.  In  the  interest 
of  the  classical  theory,  Mr.  J.  H.  Hollander,  of  Johns  Hopkins  University,  has  devoted 
a  paper  in  the  Quarterly  Journal  of  Economics,  for  January  1895,  to  showing  that  the 
conception  of  marginal  rent  does  not  depend  upon  no-rent  land,  but  is  equally 
applicable  whether  or  not  all  lands  pays  rent  —  and  this  I  think  is  today  the  received 
opinion.  ( It  must  be  said,  however,  that  Mr.  Hollander's  historical  work  is  better 
than  his  theoretical,  and  his  explication  of  the  no-rent  use  of  land  is  not  as  clear  as 
could  be  desired.)  What  I  would  call  attention  to  is  that  the  "  orthodox  "  econo- 
mists do  not  teach  that  there  is  no-rent  land  in  civilized  countries  as  a  fact;  no-rent 
land  is  with  them  only  an  hypothesis  resorted  to  for  the  sake  of  simplicity  in  the 
exposition  of  the  Ricardian  theory.  It  is  to  be  observed,  however,  that  the  "  rent  " 
of  the  poorest  land  in  use  is  not  the  rent  of  the  Ricardian  formula,  but  is,  in  the  lan- 
guage of  Vxoi^^^ox  Q^\xn^%{  Political  Economy :  Its  Character  and  Logical  Method,  ■^. 
202),  "  a  residual  phenomenon."  I  differ  from  Professor  Cairnes  and  from  the  "  ortho- 
dox "  economists  generally  as  to  the  importance  of  the  principle  which  this  residual 
phenomenon  illustrates,  as  compared  with  that  of  marginal  rent. 


THE  LAWS  OF  DISTRIBUTION  15 

is  primarily  positive.  It  is  obvious  that,  in  the  sense  of  the  term  here 
adopted,  even  if  all  the  land  in  use  were  of  equal  utility,  and  if  there 
were  a  thousand  times  more  such  land  than  the  population  could  use, 
there  might  still  be  rent  if  only  all  the  land  were  the  property  of  less 
than  the  whole  number  of  people.'  It  is  true  that  some  rent,  in  our 
sense  of  the  term,  is  higher  than  other  rent,  because  some  land  is  more 
valuable  than  other  land,  just  as  the  hiring  price  of  some  pianos  is 
higher  than  that  of  others,  because  some  pianos  are  more  valuable  than 
others.  This  difference  in  the  value  of  land  is,  however,  a  mere  inci- 
dent to  rent  considered  as  payment  for  access  to  natural  opportunity  ; 
it  is  not,  as  in  the  conception  of  marginal  rent,  the  foundation  and 
explanation  of  it. 

Not  all  land  (natural  opportunity)  pays  rent.  The  ocean,  seas,  and 
rivers,  the  air  we  breathe,  the  sunshine  that  warms  and  cheers  us,  much 
of  the  water  we  drink,  and  some  of  land-in-the-limited-sense — that  is, 
terra  firma,th.e  earth's  solid  surface,  the  soil  —  in  remote  parts  of  the 
world  where  the  population  is  sparse  and  civilization  little  advanced  — 
are  to  be  had  without  price,  are  free  to  all.  And  this  we  should  nat- 
urally expect,  for  land  is  not  only  'independent  of  human  effort,  which 
neither  produces  nor  can  increase  or  diminish  it  by  a  hair's  breadth, 
it  is  the  condition,  the  sine  qua  non  of  the  labor  and  of  the  life  of  every 
human  being,'  abiding  unchanged  as  the  generations  of  men  pass — 

*  This  is  perhaps  the  place  to  call  attention  to  the  fact  that  what  I  have  here 
stated  is  no  new  heresy,  but  is  widely  admitted  by  the  so-called  "orthodox"  econo- 
mists—  that  is,  by  the  Ricardian  school.  I  have  already  mentioned  Cairnes  and 
Nicholson;  and  Walker,  in  his  Za«^ ««</ //j  ^^«/  (pp.  ii  and  12),  says  that  when 
all  the  land  in  use  is  of  one  quality,  "  if  the  land  in  question  be  held  by  a  number  of 
competing  owners,  either  no  rent  at  all  will  be  paid,  or  else  a  rent  so  small  that  for 
purposes  of  economic  reasoning  we  may  treat  it  as  no  rent  at  all,  the  principle  de  mini- 
mis non  curatur  applying  with  not  less  force  in  economics  than  in  law."  The  assump- 
tion which  I  have  italicized  is  what  I  protest  against  as  unscientific.  I  have  no  quar- 
rel with  the  Ricardian  theory ;  I  accept  its  truth,  for  what  it  is  worth.  I  merely 
differ  from  Messrs.  Cairnes,  Walker,  Nicholson,  et  al.,  as  to  the  importance  to  be 
attached  to  it  in  economic  theory.  The  assumption  of  Walker  which  I  have  italicized 
is  the  result  of  an  exaggeration  of  the  effect  of  competition  —  an  exaggeration,  to  which 
until  very  recently,  our  economists  have  been  prone.  As  Nicholson  has  well  said  (p. 
409 ),  "  the  competition  of  the  various  owners  of  land  would  prevent  them  from  exact- 
ing a  monopoly  rent  [italics  mine],  but  the  competition  of  farmers  would  secure  to  them 
[the  landowners]  any  differential  profit  obtained  from  the  sale  of  the  produce." 

*It  is  amazing  that  this  fundamental  truth  should  be  so  little  regarded  as  it  is. 
Not  only  is  it  the  popular  impression  that  land  is  a  thing  of  interest  to  farmers,  and, 


1 6  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

SO  that  it  may  be  regarded  as  the  ever  new  gift  of  God  to  each  genera- 
tion of  his  children.  That  is,  it  might  be,  if  human  property-institu- 
tions did  not  interfere  and  give  exclusive  control  of  this  free  gift  of 
nature  to  private  individuals,  thus  enabling  them  not  only  during  their 
own  lives  to  tax  all  others  who  use  it,  and  who  must  use  it  in  order  to 
live,  but  even  enabling  a  few  men  in  one  generation  to  determine  the 
conditions  of  access  to  land  (and  consequently  the  right  to  life)  of 

in  less  degree,  to  the  users  of  business  sites  and  to  householders  as  such,  but  which 
does  not  concern  the  great  body  of  men  whose  work  is  not  directly  applied  to  land  ; 
but  one  even  meets  students  of  economics  who  talk  of  withdrawing  labor  and  capital 
from  land,  in  case  rents  are  high,  and  applying  them  "otherwise"!  —  apparently 
regardless  of  the  fact  that  not  only  is  land  necessary  as  a  pou  sto  for  every  living  being 
and  as  a  site  for  every  exertion  of  labor,  but  that  even  if  the  material  upon  which  the 
labor  is  exerted  exists  in  the  form  of  capital — has  been  previously  drawn  from  the 
land  and  converted  into  wealth  —  yet  this  material,  this  capital,  this  wealth  can  only 
be  obtained  by  resorting  to  the  land,  or,  what  is  the  same  thing,  by  the  working  up  of 
other,  simpler  forms  of  wealth,  which  must  originally  have  come  from  the  land  (  and 
the  further  removed  the  capital  in  question  is  from  the  land  —  that  is,  the  more  separ- 
ate operations  have  been  gone  through  in  producing  different  forms  of  capital  one 
from  another  —  the  greater,  generally  speaking,  will  have  been  the  number  of  land 
sites  employed  in  its  manufacture);  so  that'  no  form  of  production  can  avoid  being, 
directly  or  indirectly,  a  demand  for  land.  A  shoemaker  working  in  a  little  garret  a 
hundred  feet  from  the  ground,  which  is  both  bedroom  and  shop,  may  not  seem  to  have 
much  to  do  with  land ;  but  we  should  not  forget  that  not  only  is  a  large  portion  of  his 
"  room  rent  "  a  true  land  rent,  but  that  his  labor  constitutes  as  true  a  demand  (though  a 
less  direct  one)  upon  the  land  as  does  that  of  the  farmer.  His  leather,  his  tools,  his 
wax,  his  thread,  all  come  from  the  land.  Leather  were  unobtainable  without  hides, 
and  hides  without  beasts,  and  beasts  must  have  food  and  standing  room,  if  not  pasture 
and  herding  ground  —  and  with  these  we  get  back  to  the  land.  Even  the  man  who 
contributes  "services,"  rather  than  "productive  power" — the  domestic  servant,  the 
opera  singer,  or  the  physician  —  must  have  land ;  and,  generally  speaking,  we  may 
say  that  his  demand  upon  the  land  is  in  proportion  to  the  importance  of  his  services  and 
the  size  of  his  income.  The  singer  must  own  or  hire  a  hall,  or  some  one  must  hire  it 
for  him ;  the  doctor  must  have  an  office ;  even  the  servant  must  have  his  lodgings. 
And  all  of  these  draw  their  income  indirectly  from  the  land ;  that  is,  the  salary  of  the 
singer,  the  fees  of  the  physician,  the  wages  of  the  waiter,  are  paid  by  men  whose 
wealth  comes  from  the  application  of  labor  to  land  (generally  through  the  medium 
of  capital).  Again,  the  expenditure  of  the  artist's  or  physician's  or  servant's  income 
is  a  demand  for  land,  as  is  the  expenditure  of  the  "  producer's  "  income,  whether  he 
buy  pleasure-grounds  or  sumptuous  or  plain  apparel,  food  or  drink,  necessities  or  luxu- 
ries. In  short,  whether  we  regard  them  as  "  productive  "  workers  or  as  mere  Ten- 
derers of  services,  whether  we  consider  them  as  producers  or  as  consumers,  all  men  are 
continually  making  a  demand  upon  land  —  that  without  which  they  cannot  labor  and 
cannot  even  live.    (We  may  infer  from  this  that  when  all,  or  even  most,  land  com- 


THE  LAWS  OF  DISTRIBUTION  I? 

succeeding  generations,  the  members  of  which  are  thus  deprived  of 
what  should  be  their  birthright,  if  it  be  true  —  as  almost  all  men  are  in 
theory  agreed  it  is  —  that  the  land  belongs  in  usufruct  to  the  living.^ 

Before  we  undertake  to  state  the  law  of  rent  we  should  consider 
what  are  the  important  characteristics  of  that  kind  of  land  with  which 
we  have  to  do  in  the  problem  of  economic  distribution,  to  wit,  the 
earth's  surface.  They  are,  first,  that  it  is  2.  free  gift  of  nature  and  that 
it  is  everlasting.     Second,  that  its  quantity  is  limited^  being  the  same 

mands  a  rent,  the  amount  of  direct  and  indirect  rent  (in  the  sense  here  adopted)  which 
enters  into  the  expense  of  every  living  soul,  be  he  poor  or  rich,  and  whether  or  not  he 
applies  his  labor  directly  to  the  land,  is  very  great.) 

*  How  it  comes  about  that  land  monopoly,  or,  more  accurately  speaking,  private 
property  in  land,  should  exist  when  it  is  so  contrary  to  our  sense  of  justice  as  to  receive 
condemnation  —  at  least,  theoretical  condemnation  —  from  almost  all  the  economists* 
and  social  students  of  our  day,  and  from  men  at  large  in  proportion  as  they  have 
thought  about  it,  requires  explanation ;  and  this  explanation  is  necessary  to  a  proper 
understanding  of  the  origin  and  nature  of  rent.  The  explanation  is,  however,  very 
simple. 

We  may  see  a  parallel  phenomenon  in  our  own  time.  The  people  of  a  town  cover- 
ing considerable  territory  will  he  benefited  by  a  tram-road  running  through  it,  or  by  hav- 
ing gas  and  water  mains  put  into  their  streets ;  and  so  ^hey  gladly  permit  the  first  man 
or  company  who  applies  to  have  the  privilege  of  laying  tracks  or  mains  and  operating 
the  car  line  or  the  gas  or  water  works,  throughout  the  town.  But  from  the  nature  of 
the  case,  such  a  privilege  is,  in  effect,  a  monopoly ;  it  must  generally  be  exclusive. 
What  is  the  result  ?  The  franchise,  which,  as  the  city  grows,  becomes  worth  per- 
haps $100,000  a  year,  was  given  away  or  sold  for  a  few  hundreds  at  the  outset, 
simply  because  at  first  it  was  worth  little  or  nothing  ;  the  income  of  the  company  for 
the  first  few  years  may  have  been  hardly  sufficient  to  pay  for  the  labor  and  capital 
invested,  the  franchise,  the  opportunity  which  the  exclusive  use  of  the  street  (the  land) 
gave  them,  yielding  no  rent.  Now,  however,  the  largest  part  of  the  princely  income 
of  the  company  may  be  a  rent  yielded  by  this  franchise,  and  each  year  this  rent 
becomes  larger.  The  inhabitants  of  the  city,  whose  presence  and  labor  give  this  value 
to  the  franchise,  get  nothing  from  it  —  it  all  goes  to  the  company,  because  the  fran- 
chise has  been  allowed  to  become  private  property.  Had  the  townsmen  foreseen  the 
future,  they  would  not  have  sold  the  franchise  but  would  have  rented  it  out,  making 
provision  for  a  readjustment  of  the  rent  at  reasonable  intervals,  so  that  while  the 
franchise  was  worth  little  it  should  pay  little,  but  when  the  presence  and  labor  of  the 
large  population  had  made  the  franchise  of  great  value,  the  people  of  the  town  should 
get  the  benefit  of  that  value  in  a  large  rent  from  the  company.  Such  a  course  as  this 
with  regard  to  water,  gas,  transportation,  etc.,  would  do  much  to  distribute  the  wealth 
and  advantages  of  a  great  city  among  the  people  at  large,  instead  of  piling  them  up  in 

I  See  Walker,  "  Land  and  Its  Rent,"  pp.  198, 199  (quoting  Roscher),  and  compare  the  statements  of 
Mill.Caimes  and  Nicholson.  "  If  we  were  to  abide,  then,  by  strict  logic,  land  ought  to  belong  to  society," 
says  Gide,  p.  452. 


1 8  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

now  and  forever  and  incapable  of  any  considerable  increase  or  diminu- 
tion by  any  amount  of  human  effort.  Third,  it  is  the  necessary  condi- 
tion of  life,  the  sine  qua  non  of  labor,  the  source  of  all  wealth.  Labor 
being  the  application  of  human  activity  to  land  or  the  product  of 
land,  when  land  is  private  property  the  landless  man  must  pay  tribute 
to  some  landlord  (directly  or  indirectly)  for  every  opportunity  to  labor. 
He  is  not  free  to  labor,  but  must  pay  for  the  privilege  of  every  stroke 
of  work  that  he  performs. 

the  hands  of  a  few  individuals  and  corporations.  This  is  now  recognized,  and  in  the 
better  governed  towns  and  cities  new  franchises  are  let  out  in  this  way. 

A  similar  lack  of  foresight  —  though  one  much  more  inevitable — might  give  rise 
to  private  property  in  land.  Where  the  population  is  small,  and  there  is  enough  good 
land  open  to  all,  land,  as  such,  will  naturally  have  no  value ;  the  only  title  will  be 
possession.  Men  will  naturally  feel  that  whoever  is  using  a  particular  part  of  the  land 
should  be  undisturbed  in  his  possession  thereof ;  and  if  he  is  willing  to  abandon  it, 
after  having  expended  some  capital  and  several  years'  labor  upon  it,  what  more  natu- 
ral than  that  anyone  who  desires  to  avail  himself  of  the  slight  advantages  which  the 
the  other's  residence  and  labor  and  capital  have  given  to  this  piece  of  land,  should 
pay  that  other  therefor  ?  In  a  primitive  social  condition,  the  question  is  not  likely  to 
be  raised  whether  this  payment  is  a  payment  for  the  improvements  or  for  the  land  ; 
although,  in  fact,  it  may  be  the  former,  there  will  be  nothing  to  distinguish  it  in  form  from 
the  latter ;  there  will  simply  arise  the  custom  of  payment  from  the  transferee  to  the 
transferer  whenever  the  land  is  transferred  from  the  use  of  one  man  to  that  of  another. 
As  the  population  increases,  and  progress  is  made  in  the  arts,  the  amount  of  land  of 
the  first  quality  will  not  be  equal  to  the  demand ;  and  it  is  but  natural  that  the  rule, 
"  First  come,  first  served,"  shall  determine  who  shall  have  the  better  land.  Thereafter 
the  fortunate  possessors  of  the  better  land  will  enjoy  a  marginal  rent  from  its  posses- 
sion, and  if  they  give  it  up  they  will  be  likely  to  demand  something  for  this  natural 
advantage,  as  well  as  for  their  improvements  ;  and  if  the  transferee  recognizes  this 
natural  advantage,  he  will  be  willing  thus  to  pay  for  it,  whether  or  not  the  transferer 
has  done  anything  to  earn  it.  He  recognizes  that  "  possession  is  nine  points  of  the 
law" — that  is,  that  the  man  now  in  possession  of  the  superior  land  is  under  no  obli- 
gation to  give  it  up  to  him,  and  that  if  he  is  not  willing  to  pay  for  the  natural  advan- 
tage, the  transferer  can  turn  it  over  to  someone  else  who  will  pay  for  this  advantage. 
So  he  pays.  Thus  private  possession  of  land  passes  into  private  property  in  land.  As 
the  population  increases,  and  the  industrial  arts  improve  more  and  more,  the  lucky 
possessors  of  the  superior  land  find  themselves  richer  and  richer  by  reason  of  that  pos- 
sessory right  which  has  become  a  property  right.  In  all  probability,  whenever  there 
are  more  than  two  qualities  of  land  in  use,  men  will  have  begun  to  realize  the  advan- 
tage to  be  derived  from  the  mere  ownership  of  land ;  and  we  may  expect  that  they 
will  then  endeavor  to  possess  themselves  of  larger  tracts  than  they  have  actual  use  for, 
in  order  to  derive  an  income  from  those  who  may,  later,  wish  to  use  it.  Or  the  changes 
in  the  mode  of  life  and  the  uses  of  land  may  leave  the  heirs  of  those  who  formerly  had 
large  hunting  and  pasture  lands,  in  possession  of  extensive   tracts,  which  those  who 


THE  LAWS  OF  DISTRIBUTION  1 9 

Having  thus  considered  the  peculiar  nature  and  the  fundamental 
economic  characteristics  of  land,  we  have  an  inkling  of  the  law  of 
rent.  Analyzing  what  has  preceded,  we  find  that  land  rent  is  (or  may- 
be) composed  of  two  elements,  one  of  which  arises  from  the  difference 
in  the  value  of  different  parcels  of  land,  while  the  other  is  the  result 
of  land's  being  private  property.  But  we  know  further,  rent  and 
wages  being  the  distributive  shares  of  the  wealth  resulting  from  simple 
production,  that  if  more  than  half  the  product  goes  to  the  one,  less 
than  half  the  product  will  be  left  for  the  other — that  is  to  say,  as  a 
proportion  of  the  product,  rent  and  wages  vary  inversely.  Similarly, 
rent,  wages,  and  gross  interest  being  the  distributive  shares  of  capital- 
istic production,  any  one  of  these  must,  as  a  proportion,  vary  inversely 
as  the  other  two — that  is  to  say,  rent  varies  inversely  as  wages  and 
interest  taken  together, '  or,  in  case  either  wages  or  interest  be  station- 
ary, rent  will  vary  inversely  as  the  other. 

Putting  this  together  we  may  say  : 
come  late  upon  the  scene  will  pay  them  for  if  they  cannot  otherwise  get  access  to  good 
land.  Private  property  in  land  once  recognized,  the  time  will  soon  come  when  all 
land,  good,  bad,  and  indifferent,  will  be  owned.  And  when  that  time  comes,  all  land- 
less men  will  have  to  pay  rent  {land  rent)  ;  all  the  land  in  use,  the  poorest  as  well  as 
the  best,  will  yield  a  land  rent. 

I  do  not  mean  to  state  that  what  I  have  just  sketched  is  the  actual  history  of  the 
origin  and  development  of  private  property  in  land.  As  a  matter  of  fact,  we  know 
from  history  that  land  titles  throughout  Christendom  are  largely  based  on  forcible 
appropriation,  and  upon  the  turning  of  common  property  into  the  property  of  the 
princes  and  nobles,  who,  for  a  time,  held  it  as  heads  and  representatives  of  the  com- 
munities originally  in  possession  of  the  land.  But  it  seems  to  me  important  to  show 
that,  however  private  property  in  land  did  a.nse,  it  might  have  arisen  without  conscious 
wrong-doing  on  the  part  of  anyone ;  and  that  it  would  be  strange  if  it  had  not  arisen, 
for  the  evils  which  follow  in  its  wake  are  not  of  a  character  to  be  readily  foreseen. 
Only  after  they  are  upon  us  do  we  realize  that  in  permitting  private  property  in  land, 
society  has  necessarily  brought  evil  upon  its  head.  Private  property  in  land  was  not 
deliberately  devised  ;  it  developed  of  itself.  Had  .society  in  an  earlier  stage  the  self- 
consciousness  it  has  today,  it  might  have  seen  that  although  land  was  then  plentiful, 
it  might  not  always  remain  so ;  and  that  the  way  to  guard  against  the  injustice  of 
depriving  some  men  of  access  to  natural  opportunity  (the  condition  of  life)  upon  equal 
terms  with  their  fellows,  was  simply  not  to  allow  the  ownership  of  land  to  pass  out  of 
the  hands  of  the  state,  but  to  make  those  who  had  the  use  and  possession  of  superior 
land,  and  who  thus  had  an  advantage  over  their  fellows,  compensate  their  fellows 
therefor  by  restoring  to  the  community  the  extra  value  of  this  land  by  paying  a  suit- 
able rent  to  the  state  therefor. 

*  It  must  "not  be  forgotten  that  this  is  asserted  of  rent,  wages,  and  interest  as  a 
proportion  of  the  product.     As  absolute  quantities  they  may  rise  together  ;  that  is, 


20  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

1.  Land  below  the  margin  of  use^  will  yield  no  rent.'' 

2.  Land  at  the  margin  of  use  —  that  is,  land  of  the  poorest  quality 
in  use — will  yield  a  rent  whenever  any  part  of  so  much  of  this  land  as  is 
required  for  use  is  appropriated  by  (/.  ^.,  is  the  private  property  of)  less 
than  the  whole  number  of  those  who  must  use  it  (provided  the  product 
is  sufficient  to  leave  a  surplus  after  paying  what  is  necessary  to  get  the 
use  of  the  capital  employed  and  a  sufficient  wage  to  labor  to  induce  it 
to  exert  itself ;  otherwise,  of  course,  the  alleged  "  appropriation "  is 
not  an  actual  appropriation^  it  is  only  a  claim). 

3.  Land  above  the  margin  of  use vf'iW  yield  a  rent  over  and  above  that 
which  may  be  yielded  by  land  at  the  margin  of  use,  the  amount  of 
which  extra  rent  will  be  proportioned  to  the  excess  of  product  of  the 
land  in  question  over  that  of  lands  at  the  margin  of  use. 

I  think  we  may  now  formulate  the  law  of  rent  as  follows  : 
Land  rent  varies  directly  with  the  value,  or  power  in  combination,^ 
of  the  particular  land  in  question ;  and  with  the  proportion  between 
the  amount  of  land  at  or  above  the  margin  of  use  that  is  appropriated 
[held  as  private  property,  owned^  by  less  than  the  whole  number  of 
those  who  must  use  it  and  that  is  actually  in  use,  and  the  whole  amount 
of  such  appropriated  land  :  and  it  varies  inversely  with  wages  and  gross 
interest. 

B.    WAGES. 

After  what  has  preceded  it  will  not  be  necessary  to  treat  wages  at 
great  length. 

with  improvement  in  the  industrial  arts  a  much  larger  product  may  result  from  a  given 
expenditure  of  land,  labor,  and  capital  one  year  than  resulted  from  those  factors  the 
previous  year  ;  but  in  this  case,  while  rent,  wages  and  capital  as  absolute  quantities 
may  rise  together,  as  proportions  of  the  product  they  may  not  vary  at  all,  or  rent  may 
become  less  as  compared  with  one  or  both  of  the  other  distributive  shares,  or  it  may 
become  greater. 

^  It  will  be  observed  that  we  speak  of  the  margin  of  use,  not  of  the  margin  of 
cultivation  ;  for  we  are  considering  not  the  law  of  agricultural  rent,  but  the  general 
law  of  land  rent. 

*  Because,  no  one  using  it,  there  will  of  course  be  no  one  to  pay  rent  and  no 
product  with  which  to  pay  it.  In  other  words,  land  below  the  margin  of  use  does  not 
enter  into  production,  and  therefore  it  need  not  be  considered  in  the  problem  of  dis- 
tribution. Only  supra-marginal  land  (land  on  or  above  the  margin)  has  any  economic 
importance. 

3  This  expression  will  be  fully  explained  in  the  discussion  of  value,  which  is  to 
follow. 


THE  LAWS  OF  DISTRIBUTION  21 

By  wages  we  mean  the  share  of  the  product  resulting  from  the 
cooperation  of  labor  with  (that  is,  the  application  of  labor  to)  one  or 
both  of  the  other  factors  in  production,  which  is  distributed  to  the 
laborer  in  return  for  his  contribution  to  that  product ;  or  is  it  a  por- 
tion of  wealth,  approximately  equivalent  to  such  share,  advanced  by 
the  capitalist  to  the  laborer  before  the  completion  of  the  product,  its 
amount  being  determined  by  discounting  the  probable  value  of  such 
share  of  the  product  in  order  to  get  its  present  worth. 

In  considering  rent  we  found  that  that  which  was  peculiar  to  the 
land  that  is  considered  in  the  economic  problem  of  production,  to  wit, 
its  limited  quantity,  taken  in  connection  with  its  reduction  to  private 
property,  gave  us  the  distinctive  element  in  the  law  of  such  rent  (to  wit, 
that  it  varies  directly  with  the  proportion  between  the  amount  of  land 
at  or  above  the  margin  of  use  that  is  appropriated  and  actually  used, 
and  the  whole  amount  of  such  appropriated  land).  So,  in  considering 
wages,  we  shall  find  it  important  first  to  determine  what  it  is  that  is  the 
peculiar  characteristic  of  labor;  and  by  fixing  our  attention  upon  this 
we  may  hope  to  reach  the  distinctive  elements  in  the  law  of  wages. 

The  important  and  peculiar  fact  in  reference  to  labor,  it  will  doubt- 
less be  admitted,  is  that  it  is  the  activity  of  a  conscious  living  being 
with  certain  physical,  mental,  and  moral  demands  for  satisfaction,  some 
of  which  are  more  peremptory  than  others,  but  even  the  highest  of 
which  may  become  imperative  when  a  certain  stage  of  culture  is 
reached.  All  will  agree  that  wages  cannot  remain  below  the  point  of 
subsistence,  but  this  is  only  half  the  truth ;  they  will  not  remain  below 
the  standard  of  livings  although  that  standard  may  be  much  above  the 
point  of  subsistence.  This,  then,  is  the  distinctive  element  in  the 
determination  of  wages,  —  not  the  minimum  of  subsistence  (in  the  sense 
of  that  which  barely  keeps  sufficient  breath  in  the  body  of  the  laborers 
to  enable  them  to  continue  their  labor  and  to  procreate  others  to  take 
their  places),  but  the  standard  of  living  which  custom  and  education 
have  established  for  the  class  of  laborers  who  furnish  the  labor  in 
question. 

I  do  not  mean  to  say  that  the  standard  of  living  is  entirely  inde- 
pendent of  the  conditions  of  the  market,  or  that  it  cannot  be  lowered 
by  lowering  the  demand  for,  and  increasing  the  supply  of,  labor. 
What  I  mean  is  that  it  is  relatively  inelastic,  less  elastic  than  supply 
and  demand ;  and  that  when  a  fairly  high  standard  of  living  has  once 


2  2  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

been  established  it  will  take  a  very  great  decrease  in  the  demand  for 
and  increase  in  the  supply  of  labor  to  affect  it ;  and  that  the  immediate 
effect  of  such  change  will  not  be  to  lower  the  standard  of  living  of  the 
class  of  labor  in  question,  but  to  diminish  the  number  of  the  class  — 
that  is  to  say,  some  of  the  individuals  of  the  class  will  be  eliminated, 
but  the  standard  of  living  of  the  class  will  be  maintained  for  a  long 
time.  If  the  standard  of  the  class  is  already  very  low  the  elimination 
of  some  of  the  members  of  the  class  may  mean  starvation  and  death. 
If  the  standard  is  relatively  high  the  elimination  of  some  of  the  mem- 
bers of  the  class  will  not  mean  their  death,  save  in  a  very  few  excep- 
tional cases ;  it  will  simply  mean  that  the  weaker  members  of  the 
class  will  drop  into  a  lower  class  of  labor,  or  perhaps  become  tramps. 
And  I  think  it  may  safely  be  asserted  that  where  the  standard  of  living 
of  the  lowest  grade  of  labor  in  a  given  society  is  fairly  high  (as  it  is 
in  America  and  England  as  compared  with  India  and  China)  the  class 
will  allow  itself  to  be  exterminated  rather  than  descend  to  a  standard 
of  living  much  lower  than  that  which  at  the  time  it  maintains.  Of 
course,  in  one  country,  or  at  one  time,  the  standard  of  living  for  the 
lowest  class  of  laborers  may  be  little,  if  at  all,  above  the  point  of  sub- 
sistence, while  in  another  country,  or  in  the  same  country  at  a  later 
time,  the  standard  of  living  may  be  much  above  the  point  of  subsis- 
tence. In  the  latter  case  the  laborers  have  become  used  to  so  much 
more  than  bare  existence  that  they  will  not  work  for  less  than  will 
supply  them  with  certain  decencies  and  comforts  of  life  ;  they  will  starve 
rather  than  content  themselves  with  the  life  of  brutes.  That  which 
they  now  insist  upon  may  include  much  that  their  ancestors  would 
have  regarded  as  luxuries,  but  for  them  at  this  time  they  rank  as  neces- 
saries. His  standard  of  living  fixes  for  the  laborer  the  relative  utility 
of  different  goods  and  (what  is  merely  the  obverse  aspect  of  the  same 
thing)  the  amount  of  disutility '  which  he  will  undergo  for  their  acqui- 
sition. 

We  may  then  state  the  law  of  wages  thus : 

Wages  vary  directly  with  the  productive  power  in  combination  of 
the  specific  labor  in  question  and  with  the  standard  of  living,  and 
inversely  with  rent  and  interest. 

'  Compare  Bohm-Bawerk's  "  Ultimate  Standard  of  Value,"  for  a  recent  discussion 
of  utility  and  disutility.  His  conclusions  have  recently  been  criticised  by  Mr.  Carl 
Stroever  in  the  Annals  of  the  American  Academy  for  November  1897. 


VALUE  23 


C.     GROSS  INTEREST. 


The  problem  of  interest  is  regarded  by  not  a  few  as  the  most  diffi- 
cult question  with  which  the  economist  and  the  student  of  society  have 
to  deal.  Yet  I  do  not  think  it  is  so  abstruse  as  it  is  ordinarily  held  to 
be.  The  relation  between  gross  interest  and  true  interest  is  the  main 
problem,  and  that  will  be  considered  in  our  discussion  of  value.  For 
the  present  we  shall  give  our  attention  in  the  main  to  gross  interest. 

Gross  interest  is  the  total  return  for  the  use  of  capital ;  it  is  the 
share  of  the  product  resulting  from  the  combination  of  land,  labor, 
and  capital,  which  goes  to  him  who  provides  the  capital,  as  a  return 
for  the  contribution  which  capital  has  made  to  the  result.  In  capital, 
as  the  product  of  land  and  labor,  we  do  not  find  the  distinct  charac- 
teristic, marking  it  off  from  the  other  factors,  that  we  found  in  land 
and  labor.  Capital  depends  for  its  value  upon  its  power  at  any  given 
time  and  place  to  increase  the  productivity  of  land  and  labor — that  is, 
upon  its  productive  power  in  combination  with  the  other  factors  of  pro- 
duction. But  there  is  nothing  distinctive  in  this ;  productive  power 
in  combination  is  an  element  (indeed,  the  primary  element,  although 
not  the  distinctive  one)  in  the  value  of  land  and  of  labor.  The  law  of 
(gross)  interest,  therefore  we  may  expect  to  find  simpler  in  statement 
than  the  law  of  rent  or  the  law  of  wages.  Unlike  land,  capital  is 
capable  of  indefinite  increase ;  unlike  labor,  there  is  no  standard  of 
living  to  determine  its  value. 

We  may  therefore  state  the  law  of  gross  interest  thus  : 
Gross  interest  varies  directly  with  the  productive  power  in  combi- 
nation of  the  particular  capital  in  question,  and  inversely  with  rent 
and  wages. 

III.    VALUE. 

A.     VALUE  IN  GENERAL. 

Professor  Gide  has  well  said  that  "  the  notion  of  value  is  the  basis 
of  all  political  economy,"  and  in  view  of  that  fact  it  would  perhaps 
have  been  more  logical  to  treat  of  it  at  the  outset  instead  of  postpon- 
ing its  discussion  until  now.  My  reason  for  the  course  adopted  is  the 
belief  that  a  discussion  of  distribution,  leading  to  a  consideration  of 
the  problem  of  interest,  would  best  prepare  us  to  appreciate  the 
importance  of  a  right  apprehension  of  the  nature  of  value,  and  would 


24  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

enable  us  to  apply  our  knowledge  of  the  subject  to  the  explanation  of 
(true,  or  net)  interest  with  the  least  repetition  and  waste  of  words. 

Value  is  a  relation.  Hence  it  is  liable  to  change  with  every  change 
of  relation.  As  nothing  in  the  universe  is  permanent,  as  the  relation 
of  one  part  thereof  to  some,  if  not  to  all,  other  parts  is  constantly 
changing,  it  follows  inevitably  that  the  value  of  one  part  as  com- 
pared with  certain  other  parts,  if  not  with  all  other  parts,  must  con- 
stantly change.  The  paradox  of  science,  that  we  are  constantly  under 
the  necessity  of  measuring  things  while  yet  there  is  within  the 
universe  no  standard  of  measurement,  —  nothing  less  than  the  universe 
as  a  whole  being  permanent,  —  holds  in  economics  as  it  does  in  all 
other  departments  of  study. 

In  his  introduction  to  the  Theory  of  Value,  p.  6,  Professor  Smart 
says  that  "value  in  the  objective  sense  is  a  relation  of  power  or 
capacity  between  one  good  and  another  good  ;"  and  on  the  preceding 
page  he  tells  us  that  subjective,  or  personal  value  is  "the  importance 
which  a  good  is  considered  to  possess  with  reference  to  the  well-being 
of  a  person."  In  the  words  of  Mr.  McLeod  ^* the  value  of  any 
economic  quantity  is  some  other  economic  quantity  for  which  the  first  will 
exchange. ^^  That  is  to  say,  value  is  the  expression  of  the  relation  of 
exchangeability  between  the  thing  valued  and  one  or  more  other  things. 
A  few  moments'  consideration  must  convince  us  that  the  conditions 
which  go  to  determine  such  a  relation  are  indefinitely  numerous  and 
subject  to  constant  change.  Special  circumstances,  popular  whim, 
fashion,  may  confer  upon  a  particular  item  of  wealth  (or  portion  of 
land  or  kind  of  labor)  the  power  to  satisfy  human  desire  in  a  high 
degree;  and  therefore,  if  the  quantity- be  limited,  its  value  will  be  high 
as  compared  with  that  of  most  other  kinds  of  wealth.  But  a  change  in 
fashion  or  an  improvement  in  the  means  of  producing,  and  hence  an 
increase  in  the  quantity  of,  this  particular  kind  of  wealth,  may  greatly 
reduce  its  value  in  terms  of  those  same  kinds  of  wealth  with  which  it 
was  previously  compared.  Even  supposing  popular  desire  for  the 
thing  in  question,  and  the  quantity  available,  to  remain  about  the 
same,  a  change  in  the  supply  of  or  demand  for  any  other  kind  of 
wealth  (and  such  changes  are  constantly  taking  place)  is  a  change  in 
the  value  of  the  thing  with  which  we  started  as  compared  with  this  other 
thing.  A  certain  quantity  of  wheat,  for  instance,  may  today  have  a 
value  of  $ioo,  equivalent  to  20  good  hats,  10  pairs  of  fine  boots,  34 


VALUE  25 

barrels  of  apples,  etc.  A  week  hence,  or  even  the  next  day,  it  may  be 
worth  $110.  But  instead  of  being  worth  22  hats,  11  pairs  of  boots,  37 
barrels  of  apples,  etc.,  the  value  of  these  things  in  terms  of  money  — 
that  is,  the  price  of  these  things  —  may  also  have  changed;  so  that  not 
only  the  price  but  the  various  other  values  of  the  wheat  will  have 
changed.  The  wheat  may  then  have  a  value  of  $110,  of  23  hats,  of  10 
pairs  of  boots,  and  of  27  barrels  of  apples.  In  this  illustration  we 
have  brought  out  but  a  few  of  the  many  conditions  which  may  affect  a 
change  of  value,  but  it  will  doubtless  suffice  to  put  vividly  before  us 
the  relativity  of  value.  That  is  to  say,  that  there  is  no  specific  value 
inherent  in  anything,  but  that  with  the  change  of  time,  place,  and 
circumstance,  value  changes ;  and  that  the  nominal  value,  at  any  given 
time  and  place,  of  a  new  steam-engine,  a  hundred  gold  dollars,  or  a 
horse,  is  no  more  the  absolute  value  of  the  thing  in  question  than  is 
the  present  capitalized  value  of  a  tract  of  land  which  today  rents  for  $10 
an  acre,  but  which  twenty-five  years  hence  may  command  a  rent  of 
;?5io,ooo  an  acre.  Of  course  the  market  value  of  the  horse,  the  steam- 
engine  or  the  gold  dollar  at  any  given  time  will  probably  be  much 
nearer  its  value  at  any  other  time  than  will  the  capitalized  value  of 
land,  particularly  where  the  population  is  rapidly  shifting ;  but  the 
difference  between  the  permanence  of  value  in  these  cases  is  one  of 
degree  rather  than  of  kind.  The  notion  that  an  engine  is  worth,  say, 
$700  once  and  for  all  time,  and  that  if  anyone  makes  ^1000  out  of  it, 
gets  $1000  of  value  from  its  use,  there  must  be  something  wrong,  some 
form  of  spoliation  or  robbery  —  is  one  of  the  corollaries  of  the  labor- 
measure-of-value  superstition,'  and  is  as  baseless  as  any  other  supersti- 
tion. We  cannot  too  strenuously  insist  that  value  is  a  relation  between 
one  thing  and  another  or  others ;  that  specific  value  does  not  inhere  in 
any  given  thing,  but  that  the  value  of  everything  changes  continually 
with  the  changes  in  the  various  relations  of  things  ;  and  that  therefore, 

*  Although  the  purpose  of  this  essay  is  not  to  criticise  what  seems  true  to  others,  but 
to  present  positively  what  seems  true  to  myself,  the  constancy  with  which  there  crops 
out  in  social  and  economic  discussions,  even  where  it  is  not  explicitly  avowed  as  a 
principle,  the  notion  that  all  value  is  the  creation  of  labor,  must  be  my  excuse  for 
referring  to  it,  and  indirectly  combating  it  at  the  length  1  do  in  what  follows.  The 
fallacies  upon  which  this  notion  is  based  have  been  repeatedly  pointed  out,  and  it 
seems  strange  that  anyone  familiar  with  the  fact  that  land  (upon  which  no  labor  may 
have  been  expended)  has  value,  and  the  further  fact  that  a  farm  upon  which  a  great 
deal  of  labor  and  of  capital  have  been  expended  is  often  less  valuable,  acre  for  acre, 


2  6  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

while  we  vrnj  formulate  the  conditions  which  determine  value/  we  can- 
not y?:v  a  permanent  valuation  upon  anything. 

Bearing  this  truth  in  mind,  and  applying  it  to  the  problems  to 
which  production  gives  rise  and  which  come  to  the  surface  during  the 
process  of  distribution,  it  will  be  evident,  I  think,  that  the  value  of  any 
one  of  the  factors  of  production,  or  of  a  unit  thereof,  is  not — cannot 
be  —  something  fixed  and  constant,  but  that  the  value  of  a  given  quan- 
tity of  one  of  the  factors  of  production  varies  with  the  conditions  into  which 
it  enters. 

That  is  to  say,  a  unit  of  labor  in  combination  with  a  unit  of  land 
will  have  one  value  ;  when  an  additional  factor,  a  unit  of  capital,  is 
added,  both  the  value  of  the  unit  of  labor  and  that  of  the  unit  of  land 
will  be  different  from  what  they  were  before  ;  if,  further,  we  change 
the  number  of  the  units  of  capital  or  of  land  or  of  labor,  or  of  any  two 
or  of  all  of  them,  the  value  of  the  units  will  change  also. 

We  may  illustrate  this  by  the  case  of  a  settler,  who,  working  alone, 
is  able  to  erect  a  building  in  loo  days,  but  who,  with  four  other  men, 
having  neither  more  nor  less  ability  than  himself,  can  erect  the  same 
building  in  15  days,  while  20  such  men  can  complete  it  in  2  days. 
Supposing,  for  simplicity,  that  the  land  is  rent  free,  and  that  the  man 
working  alone  had  at  his  disposal  the  same  amount  of  capital  that  the 
five  and  the  twenty  men  had,  we  have  here  100  days'  work  (i  man,  100 
days),  75  days'  work  (5  men,  15  days),  and  40  days'  work  (20  men,  2 
days),  all  producing  the  same  result.  Suppose  we  call  this  product  x; 
then  the  labor  of  one  man  for  one  day,  when  working  alone,  is  yi^  of 
X, —  that  is  the  productive  power  in  isolation  of  one  day's  work  is 
Y^Q  ;  but  the  productive  power  of  one  man's  labor  for  one  day  in  com- 
bination with  four  other  like  units  of  labor  —  that  is,  the  productive 
power  of  the  same  unit  of  labor  in  a  group  of  five  —  is  ^-^. 

The  figures  are  not  improbable  as  far  as  the  five  and  the  twenty  men 
go ;  although  in  truth  it  would  probably  be  absolutely  impossible  for 

than  another  upon  which  less  than  one  tenth  of  the  labor  and  capital  spent  upon  the 
first  named  farm  have  been  employed  —  it  seems  strange,  I  say,  that  one  to  whom  such 
facts  as  these  are  (or  should  be)  familiar  should  still  suppose  that  value  is  necessarily 
dependent  upon  the  amount  of  labor  expended  in  the  production  of  the  thing  valued, 
instead  of  simply  upon  the  demand  therefor  and  the  supply  thereof  —  into  the  deter- 
mination of  which  labor  may  or  may  not  enter. 

"^  As  Professor  von  Bohm-Bawerk  has  attempted  to  do  in  his  paper  on  "  The 
Ultimate  Standard  of  Value,"  already  referred  to. 


VALUE  27 

one  man,  single-handed,  ever  to  accomplish  the  task.  But  this  does 
not  affect  the  principle.  There  is,  however,  a  point  which  was  neglected 
in  the  hypothesis,  to  which  we  must  now  turn.  As  a  matter  of  fact, 
the  increased  productive  power  per  capita  of  a  large  as  compared  with 
a  small  force  of  laborers  is  largely  due  to  the  fact  that  the  larger  number 
makes  possible  a  larger  use  of  capital  than  was  possible  with  but  a  few 
laborers.  Indeed,  ten  men  cooperating  with  only  that  amount  of 
capital  with  which  one  man  had  previously  worked,  and  which  he 
had  found  ample  for  his  needs,  might  produce  not  more,  but  less, 
than  ten  times  as  much  as  the  one  man  did  (although  with  no  capital 
they  would  produce  more  than  ten  times  as  much  as  one  man  with  no 
capital)  ;  because  from  insufficiency  of  tools  and  appliances  they  could 
not  work  to  the  same  advantage  as  the  one  man  who  had  all  the  instru- 
ments of  production  that  he  could  use.  But  supposing  there  were  at 
command  ten  times  as  much  capital  as  the  one  man  could  use,  then 
when  ten  men  were  employed  the  nine  tenths  of  the  available  capital 
which  was  formerly  unemployed,  because  one  man  could  not  handle 
it,  would  now  be  used,  and  the  proportion  between  labor  and  capital 
would  be  the  same  as  when  the  one  man  worked, —  then  one  unit  of 
labor  to  one  of  capital,  now  ten  units  of  labor  to  ten  of  capital.  In 
almost  any  such  case  as  this,  although  the  factors  of  production  would 
only  be  multiplied  by  10,  the  product  would  probably  be  more  than 
ten  times  as  great ;  let  us  suppose  it  would  be  fifteen  times  as  great. 
Now  to  what  is  this  increase  due  ?  Neither  to  the  increase  in  the 
amount  of  labor  (alone), —  for  that,  we  saw,  might  diminish  the  per 
capita  product  if  there  were  no  increase  in  capital ;  nor  to  the  increase 
in  the  capital  (alone), —  for  that,  we  saw,  would  be  useless  without 
increase  in  the  amount  of  labor.  In  this  case,  then,  we  must  say  that 
th^  productive  power,  or  the  usefulness  in  production,  of  doth  the  capi-' 
tal  and  the  labor  is  increased  by  their  combination,  or  cooperation.  We 
may  go  further,  although  it  is  not  necessary  to  our  argument,  and 
point  out  that  the  cooperation  of  ten  men  would  in  fact  make  possible 
not  merely  the  use  of  ten  times  as  much  capital  as  one  man  could  use 
to  advantage,  but  might  make  possible  the  advantageous  use  of  fifty 
times  as  much, —  that  is,  of  five  times  as  much  per  capita.  Here  the 
cooperation  of  nine  men  with  the  first  one,  would  make  productive 
49  units  of  capital  which  could  not  be  advantageously  used  so  long 
as  but  one  man  worked;  and,  conversely,  50  units  of  capital  would 


28  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

give  a  productive  power  to  the  labor  of  each  of  the  ten  men  much 
greater  than  such  labor  would  have  had  without  the  cooperation  of 
capital  or  than  it  would  have  with  the  cooperation  of  less  capital. 

The  illustration  just  used  shows  us  that  this  variation  between 
the  minimum  productivity  and  the  several  degrees  of  productivity 
which  the  same  unit  will  have  in  different  combinations,  holds  not 
only  of  labor,  but  likewise  of  at  least  one  of  the  other  factors  in  produc- 
tion. We  have  just  seen  this  in  the  case  of  labor  and  of  capital.  So 
with  land.  Land  at  the  mouth  of  a  navigable  river,  if  it  have  but  one 
man  to  the  acre,  may  have  little  value.  The  same  land  with  a  hun- 
dred men  to  the  acye  has  a  much  greater  value,  and  if  there  is  much 
capital  in  use  by  these  men  the  value  of  the  land  will  be  greater  than 
it  would  be  if  but  little  capital  were  in  use.  Were  there  a  thousand 
instead  of  a  hundred  men,  and  millions  instead  of  thousands  of  dol- 
lars' worth  of  capital,  the  value  would  be  still  greater.  This  we  may 
see  illustrated  in  the  history  of  Chicago. 

Take  another  case.  It  is  quite  possible  that  while  an  enterprise  in 
which  50  men  and  $50,000  are  employed  will  give  an  annual  product 
of  ICO,  if  60  men  and  ^60,000  are  employed  the  product  may  be  130, — 
in  which  case  it  is  evident  that  the  productive  power  of  each  unit  of 
the  factors  of  production  is  increased  by  its  participation  in  a  larger 
combination.  It  is  to  be  noted,  however,  that  this  case  does  not 
necessarily  mean  that  the  value  of  the  product  coming  from  the 
cooperation  of  the  60  men  and  $60,000  is  30  per  cent,  greater  than 
that  of  the  product  of  the  cooperation  of  the  50  men  and  $50,000, 
simply  because  the  product  is  quantitatively  130  per  cent,  as  great.  We 
have  learned,  empirically,  that  large  enterprises  are  generally  more 
profitable  than  small  ones,  and  so  we  may  reasonably  expect  that  the 
value  of  the  product  of  the  60  men  and  $60,000  will  be  more  than  20 
per  cent,  greater  than  that  of  the  50  men  and  $50,000;  but  it  does 
not  follow  that  it  will  be  30  per  cent,  greater.  The  increase  of  30  per 
cent,  in  the  supply  may  lower  the  demand ;  it  is  even  possible  that  it 
may  lower  it  to  such  an  extent  that  the  second  quantity  (130)  may 
have  no  greater  value  than  the  first  (100),  so  that  the  enlargement  of 
the  enterprise  brings  about  a  relative  loss.  This,  however,  is  not 
probable,  and  it  may  happen  that  the  demand  will  continue  so  stiff 
that  the  130  can  be  disposed  of  at  the  same  price  per  unit  as  the  100. 
If  this  be  the  case,  the  entrepreneur  can  afford  to  pay  higher  wages  in 


VALUE  29 

order  to  get  the  ten  extra  men,  and  a  higher  rate  of  interest  in  order 
to  increase  his  capital  by  $10,000  ;  the  law  of  competition  ensuring  that 
the  first  fifty  men  share  in  the  increase  of  wages,  and  that  the  owner  of 
the  first  $50,000  gets  the  same  rate  for  the  use  of  his  capital  that  the 
owner  of  the  last  $10,000  gets  for  his.  The  meaning  of  this,  of  course, 
is  that  here,  other  things  being  equal,  a  unit  of  labor  and  a  unit  of  capi- 
tal have  a  greater  value  in  a  large  enterprise  than  in  a  small  one.  But, 
of  course,  other  things  may  not  be  equal ;  a  considerable  increase  in 
the  population  or  a  disaster  in  other  lines  of  business  may  so  stock  the 
labor  market  that  sixty  men  can  be  as  easily  obtained  as  fifty,  with  no 
increase  of  wage.  So  with  the  capital :  its  great  abundance  at  the 
time  it  is  possible  for  the  entrepreneur  to  enlarge  his  business  may 
enable  him  to  get  his  last  $10,000  —  though  it  be  worth  more  to  him 
than  $10,000  of  his  first  $50,000  —  at  the  same  rate  that,  or  even  at  a 
lower  rate  than,  he  paid  for  his  first  $50,000.' 

We  are  not  concerned  to  prove  that  the  value,  or  even  the  produc- 
tive power  (quantitatively  considered),  of  a  unit  of  any  of  the  factors 
of  production  increases  with  the  size  of  the  combination  into  which  it 
enters.  On  the  contrary,  we  know  that,  once  past  the  point  of  dimin- 
ishing returns,  the  (quantitative)  productive  power — not  necessarily 
the  value  —  of  a  unit  of  any  one  of  the  factors  of  production  diminishes 
with  the  increase  in  the  extent  of  the  combination.  All  that  we  would 
insist  upon  is  that  (while  the  productive  power  of  the  factors  of  pro- 
duction, and  of  any  unit  thereof,  increases  with  the  extent  of  the  com- 
bination into  which  they  enter  (or  into  which  it  enters)  up  to  the  point 
of  diminishing  returns,  and  decreases  when  that  point  has  been  passed) 
the  value  of  a  unit  of  any  of  the  factors  of  production  varies  with  the 
extent  and  character  of  the  combination  into  which  it  enters.  Generally 
speaking,  the  conditions  are  too  complex  to  permit  us  to  foretell  when 
the  value  of  a  unit  will  be  increased  and  when  it  will  be  decreased  by 
entering  into  a  new  combination ;  for  concomitant  with  the  change  in 
the  size  of  the  combination  into  which  it  enters,  are  numerous  other 
changes  in  industrial  conditions,  some  of  which  may  have  a  tendency 
to  increase  and  others  to  diminish  the  value  of  the  cooperative  factors 

*  In  this  case,  availing  ourselves  of  the  terminology  used  by  Marshall  and  Bohm- 
Bawerk,  we  may  say  that  while  the  utility  of  the  man  and  of  the  dollar  is  greater  in 
the  enlarged  industry,  the  market  value  is  no  greater  because  the  disutility,  the  diffi- 
culty of  attainment,  is  less. 


30  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

in  question.  It  should  be  sufficiently  clear,  however, —  and  this  is  our 
whole  contention, —  that  as  the  value  of  anything  (being  the  relation 
of  that  thing  to  other  things)  changes  as  its  relations  change,  so,  more 
specifically,  the  value  of  a  unit  of  land,  labor,  or  capital  may  be 
expected  to  change  with  every  change  of  productive  enterprise  into 
which  it  may  enter. 

B.     VALUE  IN  RELATION  TO  TRUE  INTEREST.^ 

It  is  in  the  variability  of  value,  consequent  upon  its  relativity,  of 
which  we  have  been  speaking,  that  I  think  we  shall  find  the  explana- 
tion of  true,  or  net,  interest. 

Suppose  that  by  a  day's  labor  upon  rent-free  land  A,  working 
alone,  can  produce  4 ;  and  that,  under  similar  circumstances,  B  can 
also  produce  4 ;  and  so  with  C.  Suppose,  further,  that  by  cooperat- 
ing any  two  of  them  can  produce,  not  8,  but  10;  and  that,  if  all 
three  combine  their  labor,  they  will  produce  18.''  We  may  suppose 
that  A  and  B,  who  have  formerly  been  working  alone,  awake  to  the 
realization  of  the  truth,  that  in  union  there  is  strength,  and  resolve 
to  unite  their  forces,  and  that,  at  the  end  of  the  day,  when  the  10 
that  has  been  produced  is  to  be  distributed,  A,  who  has  proposed  to 
B  that  they  should  work  together,  proposes  to  take  5,  half  the  pro- 
duct of  their  united  labors,  and  leave  the  other  5  to  B.     What  should 

^  The  interest  here  spoken  of  is  what  Bohm-Bawerk  calls  natural  interest^  and  the 
purpose  of  this  section  of  my  work  is  merely  to  explain  the  general  principle  upon 
which  the  fact  of  interest  depends.  With  that  in  view,  I  have,  as  far  as  possible, 
ignored  the  principle  of  competition  upon  which  the  rate  of  interest  so  largely 
depends.  It  must  not  be  forgotten  that  this  is  neither  a  discussion  of  the  rate  of 
interest  nor  a  discussion  of  loan  interest. 

=  If  it  be  said  that  in  fact  A,  B,  and  C  could  not  produce  18  —  and  indeed  could 
produce  nothing  —  without  the  use  of  capital,  my  answer  is  that  if  this  be  so  it  only 
adds  to  the  strength  of  my  contention, —  which  is  that  whenever  capital  enters  into 
production,  and  the  value  of  the  product  is  greater  than  the  sum  of  what  I  designate 
as  the  "values  in  isolation"  of  the  several  units  of  the  cooperating  factors, /«r/  of  the 
increment  in  value  of  the  total  over  the  sum  of  the  isolated  values  of  the  units  which 
are  combined  to  produce  that  total,  is  due  to  capital,  is  interest.  In  my  illustration 
I  have  assumed  that  labor  is  applied  directly  to  rent-free  land  without  the  assistance 
of  capital,  partly  for  the  sake  of  simplicity  and  clearness  in  exposition,  and  partly  that 
I  might  show  those  opponents  of  my  theory,  who  claim  everything  for  labor,  that,  even 
if  labor  and  land  were  the  only  ori-ginal  productive  powers,  the  very  claims  made  for 
labor  would  ultimately  necessitate  similar  claims  for  capital. 


VALUE  31 

we  think  if  B  should  protest,  and  say  to  ^  :  "  The  value  of  the  pro- 
duct of  your  labor  is  4,  as  is  evident  from  the  fact  that  you  have 
never  produced  more  than  4  unless  you  have  had  someone  to  help 
you.  It  is  clear  then,  that,  of  the  10  produced,  all  in  excess  of  the  4 
your  labor  can  produce  is  due  to  my  cooperation  with  you  ;  the  4 
therefore  is  your  share,  and  the  remaining  6  i.s  mine."  A  would  of 
course  reply  :  "True,  I  can  only  produce  4  when  working  alone  ;  you 
can  produce  no  more ;  but  by  working  together  we  can  work  to  greater 
advantage,  and  we  then  produce  10  —  that  is  to  say,  the  share  pro- 
duced by  each  of  us  is  5  ;  4  is  the  full  wage  earned  by  the  isolated 
labor  of  each  of  us,  but  the  wage  earned  by  each  of  us  in  united  labor 
is  5."  Suppose  further  that,  when  they  have  agreed  to  this  view,  C 
proposes  to  work  with  them,  and  together  the  three  produce  18; 
whereupon  C  says  to  A  and  B:  "You  two  can  only  produce  10,  so 
you  ought  each  to  take  5 ;  the  8  additional  is  my  contribution."  A, 
who  was  first  in  the  field,  might  reply  with  just  as  much  (and  just  as 
little)  justice :  "Neither  of  you,  B  and  C,  can  earn  more  than  4 ;  you 
never  did  earn  any  more  up  to  the  time  that  you  began  to  work  with 
me;  hence  it  is  evident  that  of  the  18  produced  by  us,  8  should  be 
divided  equally  between  you,  the  remaining  10  must  be  the  reward  of 
my  exertion."  Of  course  we  see  the  fallacy  in  this,  and  recognize  that 
while  the  productive  power  of  the  labor  oi  A  or  B  or  C  in  isolation ' 
is  4,  its  power  in  combination^  is  different ;  that  its  power  in  a  combi- 
nation of  two  is  5,  and  that  in  a  combination  of  three  it  is  6. 

Now  let  us  put  it  differently.  Suppose  that  our  three  laborers,  instead 
of  all  working  simultaneously,  have  found  it  advisable  that  one  should 

*  It  makes  no  difference  to  the  argument  whether  this  "isolation"  be  relative  or 
absolute,  whether  it  be  the  isolation  of  a  group  or  of  an  individual. 

"It  may  be  well  to  call  attention  to  the  fact  that,  although  the  combination  heie 
used  as  an  illustration  is  a  contemporaneous  one,  the  principle  to  be  elucidated  does 
not  require  that  the  combination  be  contemporaneous,  and,  indeed,  the  principle  can- 
not be  fully  comprehended  unless  it  be  understood  that  the  combinations  need  not  be 
contemporaneous.  Upon  consideration  it  will  be  recognized  that  whenever  capital  is 
employed  we  have,  in  effect,  a  combination  of  present  with  past  labor.  Hence,  while 
it  may  often  appear  that  a  combination  is  very  small  —  that  of  half  a  dozen  men,  let 
us  say  —  yet,  in  fact,  by  their  use  of  capital,  the  labor  of  the  men  who  are  obviously 
engaged  in  the  enterprise  is  brought  into  combination  with  all  the  labor  (and  cap- 
ital and  land)  which  had  any  part  in  the  production  of  the  capital  they  are  now 
using  —  and  this  may,  and,  in  fact,  generally  does  go  back  hundreds  of  years,  and 
so  may  make  the  virtual  combination  a  very  great  one. 


32  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

begin  an  hour  earlier  than  the  others,  making  things  ready  so  that  the 
other  two  could  work  to  the  greatest  advantage  upon  the  later  stages 
of  the  work ;  and  that,  accordingly,  A  should  start  in  an  hour  earlier, 
and  after  keeping  an  hour  ahead  all  day  should  knock  off  an  hour 
earlier  than  B  and  C.  We  may  suppose  that  there  is  no  difference  in  the 
value  of  the  early  and  the  late  work,  and  that  so  far  as  skill  and  hard- 
ship are  concerned,  it  makes  no  difference  whether  A  ox  B  ox  C  takes 
the  early  hour  of  work.  It  will  be  perceived  that  B  and  C,  if  A  is  the 
early  worker,  really  apply  their  labor  to  the  product  of  ^'s  labor  — 
that  is,  to  wealth  that  has  been  produced  by  ^'s  labor;  and  as  wealth 
with  which  labor  cooperates  for  the  production  of  more  wealth  is 
capital,  if  we  consider  so  much  of  this  productive  process  as  takes  place 
in  an  hour,  we  find  it  to  be  the  cooperation  of  two  units  of  labor  with 
ONE  OF  CAPITAL,  although  when  we  consider  the  productive  process  of  the 
WHOLE  DAY  wc  are  at  liberty  to  regard  it  as  the  cooperation  of  three  units 
OF  LABOR.  We  may  suppose  that  ^and  C  prefer  to  regard  the  process 
as  a  combination  of  their  labor  with  /4's  capital ;  and  to  reason  that 
the  value  of  this  capital  produced  by  A  is  4,  while  the  value  of  the 
total  product  is  18,  and  that,  therefore,  since  18  minus  4  equals  14, 
and  14  divided  by  2  equals  7,  it  will  be  proper  for  them  to  turn  over  4 
to  A  and  for  each  of  them  to  keep  half  of  the  remainder  —  that  is,  7  — 
in  payment  for  his  labor.  A  might  reply  that  all  that  B  and  C  could 
produce  together,  without  him  or  the  product  of  his  labor,  was  10,  and 
that  if  from  the  total  product  of  18  this  10  be  subtracted,  8  would 
remain  ;  that,  therefore,  8  was  due  to  his  contribution,  and  B  and  C 
should  each  be  satisfied  with  5.  The  on.e  contention  seems  to  me  as 
reasonable  as  the  other;  the  fact  being  that  ^'s  contribution,  whether 
in  the  form  of  labor  or  of  capital  —  that  is,  whether  in  the  form  of 
present  labor  ("free  labor")  or  of/^^/ labor  (labor  stored  up  in  capital) 
is  equally  important  to  the  total  result,  ^'s  present  labor  has  one 
value  in  isolation  (4),  and  another  in  combination  with  two  equal 
labors  (6).  So  the  past  labor  in  ^'s  capital  has  one  value  considered 
by  itself  (4),  and  another  value  when  combined  with  the  present  labor 
of  B  and  C  (6).  The  cases  do  not  seem  to  me  to  be  essentially  different^ 
whether  what  is  combined  with  B's  and  C's  present  labor  is  A's  present 
LABOR  ^r^'j-  LABOR  OF  LAST  HOUR  ;  uor  whether  it  is  A's  labor  of  last 
hour,  or  of  last  year,  or  of  ten  years  ago.  In  any  case  the  value  in  com- 
bination of  this  factor  in  the  production  belong  to  its  owner  at  the 


VALUE  33 

time  of  the  combination  — that  is,  to  him  who  is  its  owner  during  the 
productive  process.  If  A  still  owns  the  labor  embodied  in  the  capital 
he  has  produced,  its  value  in  its  present  combination  (the  value  6) 
belongs  to  him,  even  though  the  labor  may  have  been  put  into  the 
capital  a  score  of  years  back.  If,  on  the  other  hand,  A  has  chosen  to 
sell  the  labor  embodied  in  his  capital  at  the  value  it  had  when  not 
cooperating  with  other  labor  or  capital  (the  value  4),  then  it  is  per- 
fectly proper  that  B  and  C,  who  have  bought  it,  should  get  the  increase 
of  value  (2)  which  the  past  labor  of  A  has  when  combined  with  their 
present  labor. 

Comparing  the  case  first  put  with  the  two  cases  last  proposed  we 
see  that  :  In  the  first  case,  where  A,  B,  and  C  combine  their  labor  and 
produce  18,  which  they  divide  equally,  we  say  that  each  gets  a  wage  of 
6.  In  the  second  case,  where  B  and  C  combine  their  labor  with  the 
capital  produced  by  ^'s  labor,  and  which  still  belongs  to  A,  they  also 
produce  18,  and  also  divide  the  product  equally,  and  we  say  that  B 
and  Ceach  gets  a  wage  of  6,  and  ^  a  "  gross  interest "  of  6  —  that  is, 
he  gets  back  his  principal,  or  the  value  of  his  wealth  when  not  used  as 
capital,  that  is,  when  not  combined  with  other  factors  for  the  production 
of  wealth  (4),  ^  together  with  (a  true,  or  net,)  interest  thereupon  (2)  — 
which  interest  represents  the  difference  between  the  value  of  this 
wealth  when  in  combination  with  two  units  of  labor  in  a  productive 
process  and  its  value  in  isolation.^  In  the  third  case,  where  B  and 
Chave  bought  A's  past  labor  (/.  e.,  capital)  at  its  value  in  isolation  (4), 
and  the  product  of  their  present  labor  combined  with  this  capital  (or 
past  labor)  is  again  18,  — 12  of  this  18  represents  the  wages  of  the  labor 
of  -5  and  C,  4  of  it  represents  the  isolated  value  of  the  capital  invested,  and 
the  remaining  2  represents  the  (net)  interest  on  the  "  capital  "  invested  ; 
but  in  this  case  the  interest  (following  the  present  ownership  of  the 
capital)  happens  to  go  to  the  men  who  also  contribute  the  present 
labor.  Nevertheless  it  should  be  clear  that  of  the  9  which  each  of  the 
partners  gets,  but  6  is  wage,  2  being  the  repayment  of  his  share  of  the 

^  For  simplicity  we  have  supposed  that  the  wealth  was  produced  by  the  applica- 
tion of  labor  to  rent-free  land,  so  that  the  value  of  the  wealth  might  be  equal  to  the 
value  of  the  labor  embodied  in  it. 

'  Let  me  repeat,  it  makes  no  difference  to  the  argument  whether  this  "  isolation  " 
be  relative  or  absolute,  the  point  to  be  emphasized  being  the  different  values  of  the 
same  unit  (whether  of  land,  labor,  or  capital)  according  as  it  appears  in  a  smaller  or  in 
a  larger  combination. 


34  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

capital  employed,  and  the  remainder  (i)  being  the  interest  thereupon.* 
This  illustration  seems  to  me  to  afford  a  satisfactory  explanation  of 
the  nature  of  interest.  And  I  would  parenthetically  remark  that  it 
seems  to  me  also  to  justify  it,  putting  it  upon  the  same  basis  as  wages. 
For  unless  it  be  contended  that,  although  ^'s  (present)  labor  is  more 
productive  and  has  a  higher  value  when  combined  with  ^'s  and  Cs 
than  when  exercised  alone,  yet  he  ought  not  to  receive  any  higher 
wage  when  working  with  B  and  C  than  when  working  alone,  because, 
although  he  produces  more,  he  works  no  harder  —  unless,  I  say,  this 
be  contended,''  I  cannot  see  why  it  should  be  contended  that  A  is  not 
entitled  to  the  full  present  value  of  his  past  labor,  merely  because  that 
present  value  (its  value  in  combination  with  ^'s  and  Cs  labor)  is 
greater  than  its  past  value  (its  value  when  exerted  alone).  The  past 
value  (or  value  in  isolation)  is  represented  by  the  face  of  the  principal 
—  that  is,  the  nominal  value  or  mere  wealth  value  of  the  capital ;  the 
present  value  (or  value  in  combination)  by  the  ''gross  interest  " — that 
is,  by  the  principal  plus  the  true  interest.  That  is  to  say,  (net)  interest 
is  the  difference  between  the  isolated  value  of  capital — that  is,  its 
value  as  so  much  mere  wealth  —  and  its  value  when  combined  with  other 
productive  factors  to  bring  into  being  a  new  form  of  wealth  —  that  is, 
its  value  as  capital.  This  may  be  a  negative  quantity,  a  discount,  a 
loss.  If  the  productive  undertaking  results  in  failure,  the  difference 
between  the  value  of  the  capital  in  its  original  form,  as  so  much  wealth, 
and  its  value  when  involved  in  combination  with  the  other  factors  in 
the  aforesaid  enterprise,  is  a  difference  in  favor  of  the  original  value ; 
that  is  to  say,  the  interest  here  is  a  negative  quantity.     As  value  varies 

^  It  will  be  understood,  of  course,  that  I  do  not  mean  to  imply,  by  the  definite 
quantities  used  in  my  illustration,  that  we  can  always,  or  often,  accurately  determine 
how  much  of  a  product  is  due  to  the  labor  employed  and  how  much  to  the  capital. 
My  point  is  merely  that  the  value  of  capital  in  combination  (actual  capital)  is,  or  is  likely 
to  be,  different  from  the  value  of  capital  in  isolation  (potential  capital,  or  mere  wealth), 
just  as  the  value  of  labor  in  combination  is  different  from  its  value  in  isolation;  and  that 
the  difference  between  the  wealth-value,  or  value  in  isolation,  of  the  capital,  and  its 
value  in  combination,  is  theoretical  interest.  As  to  how  much  of  the  product  goes  to 
interest,  how  much  to  wages  of  common  labor,  and  how  much  to  the  payment  of  entre- 
preneur activity,  I  have  nothing  to  say  in  this  paper. 

'  And  how  it  should  be,  I  fail  to  see.  The  fact  that  the  difference  between  the 
larger  and  the  smaller  wage  is  a  "  producer's  rent "  does  not  seem  to  me  to  furnish  any 
reason  why  the  producer  should  not  keep  it.  To  whom  should  it  go,  in  a  non-social- 
istic organization  of  industry,  if  not  to  him  ? 


VJNlV'ci^Sn 


VALUE  35 

with  every  change  in  relation  of  the  thing  valued,  so  interest  varies 
with  the  different  forms  of  capital  and  the  character  and  extent  of  the 
enterprise  in  which  it  is  employed.  Interest,  then,  is  simply  the  dif- 
ference between  the  values  of  the  same  wealth  in  different  combina- 
tions.' 

A  great  deal  has  been  made  of  time  in  the  explanation  of  interest. 
It  is  true  that  interest  cannot  be  produced  without  the  lapse  of  time, — 
simply  because  no  change  can  take  place  except  in  time,  and  interest 
is  the  measure  of  the  change  in  the  value  of  capital  which  results  from 
putting  it  into  new  relations.  But  there  is  no  special  connection 
between  time  and  (positive)  interest,  other  than  this.  In  so  far  as  the 
extent  of  the  change  in  the  capital  will  naturally  bear  a  certain  relation 

*  It  is  misleading  to  speak  of  a  common  rate  of  interest.  We  know  that  certain 
kinds  of  fixed  capital  sometimes  earn  an  interest  considerably  above  or  below  the 
so-called  current  rate.  And  not  only  so ;  but  the  same  kind  of  capital  earns  one  rate 
of  interest  here  and  another  there.  Yet  we  are  far  from  denying  that,  when  rightly 
understood,  the  doctrine  that  in  any  given  market,  at  any  given  time,  there  is  a  uni- 
form rate  of  interest,  is  true.  We  mean  when  we  say  that  the  current  rate  of  interest 
is,  say,  5  per  cent.,  that,  although  a  certain  kind  of  capital  ("  capital  goods  ")  may  at 
present  be  earning  7  per  cent.,  and  another  kind  3  per  cent.,  while  a  third  kind  may  be 
earning  6  per  cent,  employed  in  one  way  and  4  per  cent,  when  employed  in  a  different 
undertaking,  yet  the  average  earning  of  capital  is  5  per  cent.,  and,  this  being  so,  com- 
petition will  bring  it  about  that  the  kind  of  capital  now  earning  3  per  cent,  be  speedily 
reduced  in  quantity  till  it  shall  command  5  per  cent.,  while  the  quantity  of  that  which 
earns  7  be  increased  (if  some  form  of  monopoly  do  not  prevent)  till  it  shall  earn  no 
more  than  the  current  rate.  I  should  have  said  that  this  is  what  we  would  mean  if  we 
referred  to  "natural  interest"  (to  use  Bohm-Bawerk's  term)  when  we  said  5  per  cent., 
was  the  current  rate  of  interest.  What,  as  a  rule,  we  do  mean  when  we  speak  of  the 
current  rate  of  interest,  is  the  rate  of  "loan  interest,"  —  which  differs  from  the  average 
rate  of  natural  interest  much  as  the  rate  of  wages  actually  paid  to  common  labor  by 
the_entrepreneur  differs  from  the  average  of  what  such  labor  actually  produces.  Some 
enterprises  turn  out  well  and  others  result  in  disaster.  If  each  individual  laborer  were 
to  get  exactly  what  his  labor  should  actually  produce,  he  might  get  much  or  he  might 
get  little ;  his  reward  would  be  dependent  not  alone  upon  the  faithfulness  and  ability 
of  everyone  taking  part  in  the  industry  with  him,  upon  the  quantity  and  quality  of  the 
capital  used,  etc.,  but  also  upon  variations  in  supply  and  demand  and  changes  in 
methods  of  production  (which  might  result  from  the  progress  of  invention,  and  be  quite 
beyond  the  foresight  of  the  most  able  entrepreneur).  As  the  common  laborer  cannot 
afford  to  take  such  a  risk,  he  commutes  for  the  product  of  his  labor,  and  accepts  a 
definite  wage,  which  the  entrepreneur  undertakes  to  pay  him  daily  or  weekly,  as  the 
case  may  be,  regardless  of  whether  the  enterprise  results  well  or  ill.  It  is  to  be 
expected  that  this  commuted  wage  should  be  less  than  the  average  product  of  this 
class  of  labor ;  because  the  particular  enterprise  in  which  the  labor  is  engaged  may 


36  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

to  the  length  of  time  during  which  it  is  subjected  to  changing  condi- 
tions, and  in  so  far  as  the  extent  of  the  change  in  value  bears  a  relation 
to  the  extent  of  the  change  in  material  conditions,  it  is  natural  that  we 
should  find,  in  general,  that  the  greater  the  length  of  time  the  capital 
is  productively  used  the  greater  the  interest ;  but  time  will  do  nothing 
for  capital  unless  the  capital  be  combined  with  the  other  productive 
factors  (that  is,  time  will  do  nothing  for  wealth  until  it  becomes  capi- 
tal) ;dsv^  even  then,  if  the  enterprise  be  an  unfortunate  one,  time  may 
only  bring  about  negative  interest, —  that  is,  the  value  of  the  capital 
may  diminish.' 

Bohm-Bawerk,  following  Galiani,  puts  the  stress  on  time  in  his 
explanation ;  and  although  his  explanation  may  be  good  so  far  as  it 
goes,  its  limitation  is  that  it  carriers  the  implication  that  present  goods 
are  always  more  valuable  than  future  goods,  and  always  must  be,  and 
that  this  is  the  explanation  of  interest.  This,  I  think,  is  a  misplace- 
ment of  qmphasis.     As  a  matter  of  fact,  that  which  was  capitaP  last 

result  in  a  loss,  in  which  case  the  entrepreneur  will  suffer,  while  the  laborer,  whose 
wage  is  guaranteed,  will  nevertheless  get  the  agreed  sum  for  the  labor  he  has 
expended.  It  is  natural,  therefore,  that  the  entrepreneur  should  charge  for  the  insur- 
ance, and  that  this  element  of  insurance  should  take  the  form  of  a  discount  upon  the 
average  productivity  of  the  class  of  labor  in  question,  so  that  the  wage  actually  paid 
would  be  less  than  such  average  productivity.  Now  the  rate  of  loan  interest  is,  I 
believe,  similarly,  a  commutation  of  the  rate  of  interest  earned  (produced)  by  capital ; 
but  in  this  case  the  commutation  is  a  more  complex  operation.  The  element  of  insur- 
ance may  here  be  said  to  appear  on  both  sides.  In  so  far  as  the  borrower  must  be 
compensated  for  guaranteeing  a  fixed  return  to  the  lender,  whether  the  enterprise  in 
which  the  capital  is  used  shall  prove  profitable  or  unprofitable  to  him,  this  tends  to 
lower  the  rate  of  loan  interest ;  and,  on  the  other  hand,  in  so  far  as  the  lender  must 
insure  himself  against  the  possibility  that  the  principal  will  not  be  returned  and  that 
the  security  will  afford  insufficient  indemnity,  this  tends  to  raise  the  rate  of  loan 
interest.  It  will  be  seen  then  that  the  rate  of  the  loan  interest  does  not  necessarily 
coincide  with  the  productivity  of  capital,  but  that  it  is  a  commutation  and  a  somewhat 
complex  one. 

^  It  should  be  noted  in  passing  that  the  effect  of  time  upon  "  the  vital  forces  of 
nature  "  — of  which  Turgot,in  the  earliest  "fructification"  theory,  and  Henry  George, 
in  the  later  one,  have  made  much  (see  Bohm-Bawerk,  Capital  and  Interest,  book  i, 
c.  iii,  and  book  vii,  c.  ii,  for  criticism  of  these  theories)  —  doubtless  plays  its  part  in 
production  of  interest.  Time  is  here  the  condition  of  new  and  larger  combinations  of 
organic  elements,  thus  causing  a  change  in  value.  And  this  change  in  the  value  of 
the  direct  products  of  nature  will  naturally  affect  the  value  of  all  other  things  with 
which  they  are  in  relation. 

*  While  I  do  not  accept  Bohm-Bawerk's  definition  of  capital,  I  do  not  think  that 


VALUE  37 

year,  and  will  be  capital  year  after  next,  may  command  no  interest  this 
year  and  next  year.  If  in  time  of  civil  commotion  I  take  all  my  wealth 
(including  capital)  to  a  safe  man  and  beg  him  to  keep  it  for  me,  making 
what  use  of  it  he  likes  provided  only  he  will  return  to  me  the  bulk  of  it 
less  a  percentage  as  a  wage  for  his  care  of  it, —  he  may  use  a  portion  of 
my  wealth  as  capital  and  yet  pay  me  no  interest  therefor,  but  on  the 
contrary  retain  part  of  the  wealth  committed  to  him  as  payment  for  his 
care  and  protection  of  it  as  a  whole, —  that  is,  of  so  much  of  it  as  he 
returns  to  me.  I  may  take  to  him  105  units  of  wealth,  much  of  which 
had  in  my  hands  been  capital ;  he  may  use  part  of  these  units  as 
capital,  so  that  on  the  whole  the  transaction  would  be  an  advantageous 
one  to  him  even  if  I  did  not  pay  him  for  keeping  the  wealth ;  but 
instead  of  paying  me  interest  on  the  capital,  he  returns  to  me  but  100 
of  the  105  units,  retaining  the  5  units  as  payment  for  the  service  he  has 
rendered  me  in  preserving  for  me  the  100  units  intact.  I  pay  gladly, 
because  I  know  that  if  he  had  refused  I  should  have  lost,  not  y-§^,  but 
perhaps  \%%^  and  possibly  the  whole  105.  The  payment  he  demands  is 
just,  because  there  was  such  a  demand  for  his  services  that  he  could 
have  gotten  as  much  as  from  me  from  any  one  of  a  hundred  other  pro- 
prietors ;  and  as  he  could  not  take  the  care  of  wealth  for  them  all,  it  is 
just  that  I  should  pay  for  the  preference  he  showed  me  in  accepting  the 
care  of  my  wealth.  If,  again,  in  ordinary  times,  this  same  man,  having 
the  ability  to  use  advantageously  and  productively  more  capital  than  he 
owns,  feeling  that  with  my  capital  his  labor  would  be  more  productive 
than  it  could  be  without,  should  take  my  capital  and  pay  me  interest 
upon  it, —  the  transaction  would  seem  to  be  no  less  equitable  than  the 
one  previously  described.  Here  we  have  two  cases  of  the  use  of  capital,— 
in  one  of  which  interest  is  paid,  and  in  the  other  of  which  it  is  not 
paid;  and  in  both  cases  we  declare  the  transaction  just.  What  is  the 
explanation  ?  Is  it  not  that  in  each  case  a  service  is  done  ?  In  the 
first  case  the  service  done  me  in  ensuring  the  preservation  of  the  bulk 
of  my  wealth  is  greater  than  the  service  done  him  in  giving  him  the  use 
of  my  capital.  In  the  second  case  the  service  done  him  in  enabling  him 
to  get  larger  wages  for  his  labor  and  larger  interest  upon  his  own 
capital  by  the  use  of  my  capital  is  greater  than  the  service  done  me  by 
the  preservation  of  my  capital.    In  other  words,  we  refrain  from  paying 

the  difference  between  his  definition  and  mine  is  so  great  that  we  need  expatiate  upon 
the  difference  at  this  point. 


38  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

interest  in  the  first  case  supposed,  because  the  service  to  the  owner  of 
the  capital  in  preserving  it  is  greater  than  the  service  to  the  entrepre- 
neur which  the  productive  power  of  capital  gives.  In  the  second  case 
it  is  the  other  way,  and  usually  the  balance  of  service  is  the  other  way, 
and  therefore  interest  is  usually  paid — and  justly  so. 

C     SUMMARY  AS  TO  VALUE. 

As  (capitalistic)  production  is  a  recombination  of  land,  labor  and 
capital  undertaken  because  it  is  believed  that  in  the  new  combination 
the  several  factors  can  be  used  to  greater  advantage  than  out  of  it, — 
that  is,  will  be  of  greater  advantage,  will  have  more  value,  —  we  naturally 
assume  that  production  is  a  creation  of  value.  And  naturally  also  it 
generally  does  effect  an  increase  in  value ;  but  not  necessarily  so ; 
whether  it  does  so  or  not  depends  upon  a  number  of  circumstances,  — 
in  the  main  on  the  foresight  of  those  who  plan  it,  and  somewhat  upon 
chance.  An  unforeseen  change  in  fashion  or  a  sudden  great  discovery 
in  the  mechanical  arts  may  make  the  production  of  certain  things  a 
positive  injury  to  all  concerned  in  the  undertaking,  reducing  the  value 
of  the  capital  employed  to  almost  nothing.  Or  in  case  college  boys 
on  a  lark  enter  upon  the  production  of  firewood  from  the  president's 
carriage,  they  may  succeed  in  producing  just  what  they  wish  to  pro- 
duce,—  and  perhaps  we  must  assume  that  for  these  young  scoundrels 
the  firewood  has  greater  utility  than  the  carriage, — but  to  the  owner  of 
the  carriage  (as  to  the  world  at  large)  this  conversion  of  his  wealth,  the 
carriage,  into  a  factor  in  \hQ  production  of  firewood  is  a  great  destruction 
of  value. 

In  change  of  value,  whether  it  be  increase  or  decrease,  whether  we 
have  positive  or  negative  interest,  there  is  nothing  strange  or  unusual. 
We  have  already  seen  that  land  and  labor,  as  well  as  capital,  change  in 
value  with  the  extent  and  character  of  the  various  combinations  of 
which  they  form  a  part.  But  this  does  not  seem  paradoxical  in  the 
case  of  labor,  for  instance,  because  the  wage  —  the  estimated  value  of 
the  labor  in  the  productive  enterprise  —  is  the  only  expression  of  value 
that  we  are  accustomed  to  give  to  labor;  "gross  interest,"  however  — 
the  estimated  value  of  the  capital  in  the  productive  enterprise  —  is  not 
the  only  expression  of  value  we  are  accustomed  to  give  to  capital.  On 
the  contrary,  we  regularly  speak  of  what  I  have  previously  designated 
as  its  value  in  isolation  —  that  is,  its  mere  wealth  value  ;  and  it  is  this 


VALUE  39 

wealth  value,  the  value  it  has  prior  to,  or  outside  of,  the  productive 
enterprise,  by  which  we  generally  designate  it.  Hence  we  are  likely 
to  fall  into  the  error  that  a  specific  value  is  something  inherent  in  a 
particular  thing  as  such,  instead  of  being  dependent  upon  its  relations, 
and  we  are  prone  to  assume  that  this  ''wealth  value"  of  capital  is  its 
"true"  value,  and  that  any  value  over  and  above  this  cannot  rightfully 
belong  to  it.  It  is  for  this  reason  that  interest  seem  to  so  many  to  be 
unjust. 


PART    II 

APPLICATION 


41 


APPLICATION. 


I.     WHAT  IS  MEANT  BY  AN  EQUITABLE    DISTRIBUTION. 

Before  discussing  the  means  whereby  an  equitable  distribution  of 
wealth  can  be  effected,  we  must  consider  what  is  meant  by  an  equitable 
distribution. 

That  is  ordinarily  considered  "just  "  which  gives  to  men  accord- 
ing to  their  deserts  —  and  this  is  commonly  held  to  mean,  in  propor- 
tion to  their  contributions.  But,  considered  carefully,  this  leads  us 
into  an  endless  round ;  for  men  can  give  only  in  proportion  as  they 
have  received ;  hence  if  they  give  much,  it  means  that  they  have  pre- 
viously received  much.  The  man  of  fine  physique,  strong  mind  and 
great  heart  is  debtor  to  the  universe,  to  the  race  and  to  society  for  the 
advantages  of  nurture  and  education  which  his  ancestors  and  himself 
have  received  to  make  him  what  he  is.  The  able  man  of  today  did 
not  make  himself;  nor  could  he  be  what  he  is  but  for  the  advanced  state 
of  human  culture  at  the  time  of  his  birth  —  an  advantage  of  which  he 
who  is  born  in  a  good  (  not  necessarily  a  rich)  home,  reaps  the  benefit ; 
while  it  must  be  largely  foregone  by  his  fellow  born  in  the  slums. 
Further  than  this,  however  richly  he  might  be  endowed  by  inheritance^ 
the  able  man  could  not  do  what  he  does  but  for  the  contemporaneous 
social  conditions  —  peace,  civil  freedom,  intellectual  culture,  material 
civilization,  etc. —  which  he  shares  with  all  his  fellows,  but  which  his 
personal  advantages  render  more  valuable  to  him  than  they  are  to  his 
less  fortunate  brothers. 

"Justice,"  then,  as  ordinarily  understood,  seems,  when  analyzed,  to 
be  merely  the  survival  of  the  fittest  —  without  regard  to  what  it  is 
that  makes  one  fit.  "  To  him  that  hath  shall  be  given,  and  from  him 
that  hath  not  shall  be  taken  away  even  the  little  that  he  seemeth  to 
have."  That  is  not  exactly  what  we  seek  to  secure  by  "  a  more  equit- 
able distribution."  The  aim  society  proposes  to  itself  is  not  the  sur- 
vival of  the  fittest  —  it  takes  that  for  granted — but  its  desire  and  its 
endeavor  are  to  improve  that  environment  to  which  man  is  to  fit  him- 

43 


44  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

self  and  to  increase  the  number  of  the  fit.  By  a  more  equitable  dis- 
tribution we  mean  one  which  will  more  nearly  give  to  the  masses, 
the  poorer  and  less  highly  endowed  classes,  the  same  opportunity  to 
make  the  best  of  themselves  that  is  enjoyed  by  their  richer  and  more 
talented  brethren.  We  speak  of  a  more  equitable  distribution,  one 
which  will  more  nearly  give  to  the  masses  the  same  opportunity  to  make 
the  best  of  themselves  that  the  fortunate  few  possess,  because  we 
recognize  that  we  can  only  approximate  to  equality  of  opportunity. 

Now  what,  from  this  point  of  view,  is  equitable  as  regards  the  dis- 
tribution of  the  product  of  the  combination  of  land,  labor  and  capital  ? 

Even  that  extreme  school  of  socialists  whose  doctrine  is,  "  From 
every  one  according  to  his  abilities,  to  every  one  according  to  his 
needs,"  might  be  brought  to  admit  that  one's  needs  are  likely  to 
approximate  pretty  closely  to  his  abilities;  so  that  the  generally 
accepted  doctrine  of  a  "just"  wage,  to  wit,  that  it  is  so  much  of  the 
product  as  is  due  to  the  participation  of  labor  in  the  productive  proc- 
ess, may  be  in  substantial,  although  not  in  formal,  agreement  with 
that  of  this  school.  And  as  the  school  referred  to  is  the  only  one,  so 
far  as  I  know,  that  questions,  even  in  form,  the  current  doctrine  of  a 
"just"  wages  I  think  we  may  accept  that  doctrine,  without  further 
discussion,  as  our  point  of  departure. 

Assuming  then  that  a  "just "  wage  is  an  approximately  equitable 
wage,  —  that  is,  that  the  laborer  should  be  paid  a  wage  corresponding 
to  the  contribution  of  labor  to  the  product,  —  what  are  we  to  say  as  to 
the  payment  for  land  and  capital  ?  We  have  seen  that  labor  is  impos- 
sible without  land,  and  that  highly  productive  labor  is  impossible  with- 
out capital.  Land  and  capital,  then,  are  the  opportunities  of  labor ; 
and  as  we  have  determined  that  the  equalization  of  opportunity  is 

*  It  should,  however,  be  noted,  that  general  acceptance  of  the  doctrine  that  a  just 
wage  is  so  much  of  a  product  as  is  due  to  the  participation  of  the  labor  in  the  pro- 
ductive process,  leaves  the  door  open  for  a  great  diversity  of  opinion  as  to  how  much 
of  the  total  product  should  actually  go  as  wages  under  this  rule  —  that  is,  how  much 
of  the  product  is  due  to  the  participation  of  labor.  On  the  one  hand,  we  have  such 
views  as  those  of  the  Marxian  socialists,  that  all  of  the  product  except  so  much  as  is 
necessary  to  replace  the  capital  actually  used  up  in  the  process  belongs  to  the  laborer 
as  wages ;  and  on  the  other  hand  we  have  Professor's  Marshall's  notion  that  the  price 
paid  for  the  "marginal  laborer"  determines  the  just  rate  for  wages.  I  think  we  must 
frankly  admit  that  we  cannot  in  all  cases  accurately  determine  just  what  part  of  the 
product  the  formula  adopted  calls  for ;  but  we  shall  see  that  this  is  of  less  importance 
than  it  may  at  first  seem  to  be. 


WHA T  IS  MEANT  BY  AN  EQUITABLE  DISTRIB UTION  4 5 

the  end  to  be  obtained  by  an  equitable  distribution,  it  follows  that 
(whether  or  not  landlord  or  capitalist  deserves  any  payment)  rent  and 
interest,  proportioned  to  the  value  of  the  land  and  the  capital,  should 
be  paid,  if  for  no  other  purpose  than  to  equalize  opportunity.'  Since 
it  is  impossible  that  all  laborers  shall  have  just  the  same  oppor- 
tunities, it  is  fair  that  the  advantage  some  men  must  have  over  others 
(who  may  be  no  less  able  and  industrious  than  those  thus  preferred), 
by  reason  of  access  to  rich  land  and  abundant  capital,  should  be  coun- 
terbalanced, or  compensated  for,  by  a  payment  from  these  favored 
laborers  of  such  rent  and  interest  as  shall  measure  the  value  of  the 
land  and  capital  which  constitute  their  opportunity.  These  fortunate 
laborers  would  then  get  no  more  than  the  quantity  and  quality  of  their 
labor  entitled  them  to. 

But  granting  that  rent  and  interest  should  be  paid,  to  whom  should 
they  be  paid  ?  This  is  quite  a  different  question,  and  to  answer  it 
properly  we  must  consider  rent  and  interest  separately. 

Let  us  first  consider  rent,  the  payment  made  for  the  use  of  land. 
The  value  of  land,  as  distinguished  from  the  value  of  its  improvements 
(which  latter  value  is  the  value  of  the  labor  and  capital  employed  upon 
the  land,  and  is  so  considered  in  economic  reckoning),''  is  mainly  due 

*  This  is  the  essence  of  Professor  Hadley's  justification  of  interest  ( see  his  mono- 
graph on  "  Interest  and  Profits  " ).  It  is  not  necessary  for  our  present  purpose  to 
develop  his  justification  of  interest  beyond  this  point,  and  show  that  production  is 
directly  served  by  letting  out  capital  to  the  highest  bidder  (  and  the  same  principle 
holds  with  reference  to,  land )  because  this  has  a  tendency  to  ensure  its  getting  into 
the  hands  of  the  men  who  are  capable  of  using  it  most  productively,  and  to  keep  it 
out  of  the  hands  of  the  men  who,  like  the  servant  entrusted  with  the  one  talent,  would 
bury  it  in  unproductive  or  less  productive  uses. 

*  Of  course  there  may  sometimes  be  difficulty  in  determining  how  much  of  the 
gross  value  of  realty  is  true  land  value,  and  how  much  of  it  is  the  result  of  the  private 
expenditure  of  labor  and  capital  by  the  landholder,  a  difficulty  which  may  result  from 
the  fact  that  the  expenditure  of  labor  and  capital  in  question  has  been  made  very 
little  at  a  time  and  continued  through  a  long  period  of  years,  or  from  the  fact  that  it 
was  made  very  many  years  ago.  As  regards  such  cases,  it  should  in  the  first  place  be 
remembered  that  we  do  not  expect,  and  that  no  sane  man  should  expect,  to  reach  an 
absolutely  perfect  measurement  of  values ;  and  in  the  second  place  it  is  to  be  said 
that  these  cases  are  not  so  likely  to  arise  as  is  commonly  imagined,  and  can  generally 
be  settled  with  approximate  justice  when  they  do  arise.  The  difficulty  can  generally 
be  determined  by  comparing  the  land  in  question  with  some  other  land  in  the  neigh- 
borhood, the  circumstances  of  which  give  it  a  value  approximating  that  of  the  land  in 
question,  but  concerning  which  there  is  not  the  same  question  as  to  the  private  expend- 


46  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

either  to  the  bounty  of  nature  or  to  social  action  (as  where  the  con- 
centration of  a  great  population  has  given  a  very  high  value  to  the 
barren  rocks  of  Manhattan  Island),  not  to  the  labor  of  the  individual 
landholder.  We  have  already  seen  what  the  peculiar  characteristics  of 
land  are:  that  it  is  a  free  gift  of  nature  (not  in  part  the  result  of 
human  labor,  as  is  wealth);  that  its  quantity  is  fixed  (not  capable  of 
indefinite  increase,  as  is  wealth  generally) ;  and  that  it  is  that  without 
which  the  least  exercise  of  labor  is  absolutely  impossible,  the  source  from 
which  the  material  of  all  wealth  is  drawn.  These  considerations, 
together  with  the  others  adduced  in  the  first  division  of  this  disserta- 
tion,' lead  us  to  the  conclusion  that  land  should  not  be  owned  by  pri- 

iture  of  labor  and  capital.  If  the  land  first  mentioned  is  found  to  be  of  greater  value 
than  that  with  which  it  is  thus  compared,  although  it  does  not  appear  to  have  any 
natural  advantage  over  it,  or  to  have  profited  more  largely  than  it  by  the  social 
activity  of  the  community  (as  distinguished  from  that  of  the  individual  landholder), 
then  we  may  infer  that  the  difference  in  value  is  due  to  the  private  expenditure  of  the 
landholder,  and  it  should  therefore  be  regarded  as  an  improvement  and  reckoned  as 
part  of  the  landholder's  capital.  If,  on  the  contrary,  there  is  found  to  be  no  differ- 
ence in  value  between  the  tracts  thus  compared,  we  may  assume  that  the  present 
value  of  the  land  first  considered  is  a  true  land  value,  and  that  the  capital  and  labor 
in  question  have  not  made  any  enduring  addition  to  the  value  of  the  land.  This,  it  is 
probable,  will  generally  be  the  case ;  for,  as  General  Walker  has  pointed  out  in  his 
criticism  of  Bastiat  (in  Land  and  Its  Rent,  folio  8i,  et  passim),  labor  and  capital  are 
generally  invested  with  the  reasonable  expectation  of  obtaining  the  fruits  of  such 
investment  at  once,  or  within  a  short  term  of  years.  Further  than  this,  it  is  never  to 
be  assumed,  merely  because  labor  and  capital  have  been  expended,  that  there  must,  in 
consequence,  be  an  increase  in  value.  While  such  a  conclusion  is  a  legitimate  infer- 
ence from  the  labor-source-of-value  theory,  it  falls  with  the  downfall  of  that  theory. 
Do  we  not  all  know,  from  our  own  experience,  that  labor  is  frequently  expended  with- 
out producing  anything  of  value  (in  the  economic  sense) ;  and  are  not  unsuccessful, 
disastrous  investments  of  capital  matters  of  daily  occurrence  ?  In  such  cases  there  is 
no  natural  wage,  and  only  negative  interest,  even  the  principal  of  the  capital  some- 
times being  entirely  destroyed.  A  man  may  think  he  is  an  artist  and  labor  away  ten  or 
twelve  hours  a  day,  almost  starving  himself  meanwhile,  only  to  produce  a  painting 
which  may  be  a  positive  eyesore ;  or,  to  take  an  illustration  nearer  home,  the  fact  that 
the  writer  of  the  present  essay  has  incorporated  into  it  certain  results  of  some  fifteen 
years'  study  of  economic  and  social  questions,  and  that  most  of  his  labor  for  the  last 
six  months  has  been  expended  upon  it,  does  not  insure  that  any  publisher  will  give 
five  cents  for  it.  In  short,  the  labor  expended  upon  it  does  not  insure  it  any  value  ; 
for  labor  is  not  the  source  of  value,  which  depends  upon  the  condition  of  the  market, 
into  the  determination  of  which  labor  may  play  a  large  or  a  small  part,  according  to 
circumstances. 

*  Still  others  might  be  considered  did  space  permit ;  such  as  the  effect  of  land 


WHAT  IS  MEANT  BY  AN  EQUITABLE  DISTRIBUTION  47 

vate  individuals,  but  that  in  equity  those  who  occupy  the  land  should 
pay  rent  to  the  state  as  trustee  for  human  society. 

Now  as  to  interest,  the  payment  for  the  use  of  capital  :  If  land  were 
nationalized  and  all  rent  went  to  the  state,  then  it  seems  clear  to  the 
writer  that  interest  might  properly  enough  be  paid  to  the  capitalist. 
For  in  that  case  the  capitalist  must  have  already  paid  to  the  state  the 
just  rent  for  that  which  nature  or  society  (/.  e.,  the  land)  contributed 
to  his  capital ;  and,  assuming  that  the  other  labor  (if  any)  which 
cooperated  with  his  in  the  production  of  the  wealth  received  its  just 
wage,  the  wealth  now  in  his  possession  is  the  wage  of  the  labor  he  has 
previously  expended  in  production.^  If  our  conclusion  in  the  section 
on  **  Value  and  Its  Relation  to  Interest"  is  correct,  our  reasoning  as 
to  wages  is  also  applicable  to  gross  interest ;  and  if  it  is  right  that  a 
man  employing  his  (present)  labor  alone  should  receive  a  small  wage 
simply  because  the  product  is  small,  and  equally  right  that  when 
employing  his  (present)  labor  together  with  that  of  many  other  labor- 
ers and  a  correspondingly  large  capital  (although  working  no  harder 
than  before)  he  should  receive  a  larger  wage,  because  the  product  is 
larger,  then  it  seems  no  less  fair  that  so  much  of  his  labor  as  is  stored 
up  in  wealth,  if  it  also  is  used  productively,  should  bring  a  return 
(gross  interest)  proportioned  to  the  productiveness  of  the  use  to  which 

speculation  in  forcing  the  margin  of  use  lower  than  the  needs  of  society  require,  and 
the  reaction  of  such  land  speculation  upon  general  industrial  conditions. 

^  I  have,  of  course,  assumed  that  the  capitalist  came  honestly  by  his  capital ;  that 
he  earned  it.  The  undoubted  fact  that  many  capitalists  have  not  honestly  earned 
their  wealth,  but  have  come  into  possession  of  it  by  very  crooked  paths  —  whether  by 
illegal  action  or  by  unjust  laws,  by  trickery  and  dishonesty  toward  their  competitors 
and  customers,  or  by  spoliation  and  oppression  of  their  employees  —  cuts  no  figure  in 
the  case  now  before  us.  Underlying  all  discussions  of  the  rightfulness  of  interest,  and 
often  sadly  confusing  them,  it  is  true  that  we  generally  find  lurking  the  question  as  to 
the  rightfulness  of  the  ownership  of  the  capital.  We  must  recognize  this  as  an 
important  question  in  any  given  case  ;  but  it  is  entirely  distinct  from  the  question  now 
before  us.  Let  us  not  forget  that  capital  is  simply  wealth  put  to  certain  uses  —  to 
productive  uses.  Hence,  if  we  accept  the  right  of  private  property  at  all,  if  a  man 
may  rightfully  own  wealth  at  all,  and  may  apply  it  productively,  then  capital  may  be 
rightfully  owned.  Of  course  a  man  who  does  not  rightfully  own  the  capital  should 
not  get  interest  upon  it.  But  that  is  a  truism  which  does  not  concern  us  here.  The 
question  as  to  interest  is  :  "  Should  the  capitalist  receive  it  in  any  case,  in  case  the 
rightfulness  of  his  ownership  of  the  capital  is  unquestioned  ?  "  In  seeking  an  answer 
to  this  question,  therefore,  we  should,  of  course,  assume  a  case  in  which  the  capital  has 
been  rightfully  acquired. 


48  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

it  is  put.  Suppose,  as  above,  that  working  alone  and  with  little  capi- 
tal, a  man  produces  but  a  small  daily  wage,  which  we  will  call  20,  but 
that  when  many  other  men  and  a  large  amount  of  capital  are  cooper- 
ating with  him,  the  per  capita  wage  earned  is  considerably  larger,  say 
24  ?  Suppose,  further,  that  he  should  be  able  to  live  without  imme- 
diately consuming  the  small  wage  (20),  and  should  see  that  the  labor 
which  produced  it  had  little  productiveness  because  not  combined  with 
a  sufficient  number  of  other  productive  factors  to  get  the  benefit  of  the 
law  of  increasing  returns ;  and  that,  now  that  this  labor  was  stored  up 
in  the  wealth  that  constituted  his  wages,  he  should  keep  it  until  he  got 
a  chance  to  combine  it  with  other  productive  factors  in  order  that  he 
might  get  the  larger  reward  which,  in  accordance  with  a  principle 
analogous  to  the  law  of  increasing  returns,  may  be  expected  by  each 
of  the  units  of  the  factors  of  production  when  they  form  part  of  a 
large  combination  ?  And  suppose  that  he  finds  a  chance  to  com- 
bine this  past  labor  with  a  small  quantity  of  other  past  and  present 
labor  and  land,  and  that  his  share  of  the  product  is  22, —  where  is  the 
wrong  ?  Even  after  he  has  converted  his  isolated  labor  (whose  imme- 
diate wage  was  20)  into  capital,  he  gets  but  22  from  it;  while  from 
labor  no  harder,  but  combined  with  that  of  many  others  and  with 
abundant  capital  and  land,  he  might  get  24. 

Is  it  not  true,  indeed,  that  the  possibility,  which  interest  affords,  of 
saving  up  labor  (that  is,  its  product)  which  cannot  immediately  be 
applied  to  the  greatest  advantage,  and  of  putting  it  at  a  later  day  into 
a  more  productive  combination,  contributes  to  equity  by  doing  some- 
thing to  put  the  frugal  laborer,  who  must  for  a  time  remain  at  a  dis- 
tance from  the  more  productive  center,  upon  an  equality  with  his  more 
fortunate  fellow  who  is  on  the  ground  where  he  can  cooperate  with 
others  in  highly  productive  industry  ?  Before  leaving  the  subject,  one 
other  consideration  should  be  mentioned.  If  the  capitalist's  wealth  is 
unwisely  or  unfortunately  invested,  he  generally  gets  negative  interest ; 
that  is,  he  loses  part  or  the  whole  of  the  principal  of  his  capital  and 
gets  no  interest.  (He  may  have  lent  it  to  an  entrepreneur,  instead  of 
directly  employing  it  himself,  on  such  terms  that  the  latter  is  legally 
liable  to  pay  him  for  principal  and  (positive)  interest ;  but  the  entre- 
preneur's legal  liability  will  avail  the  capitalist  nothing  if  the  entre- 
preneur is  not  pecuniarily  responsible.  And,  in  any  event,  wherever 
there  is  an  unfortunate  employment  of  wealth  as  capital,  some  wealth- 


WHAT  IS  MEANT  BY  AN  EQUITABLE  DISTRIBUTION  49 

owner — whether  it  be  he  whose  capital  is  invested,  or  the  entrepreneur 
who  invested  it,  in  his  capacity  as  wealth-owner,  or  the  surety  of  the 
entrepreneur  —  must  suffer  the  loss.)  And  if  the  capitalist  suffers  loss 
when  the  enterprise  is  unproductive,  he  should  gain  a  benefit  when  it 
is  highly  productive.  Our  conclusion,  then,  is  that  it  is  right  to  pay 
interest  to  the  capitalist,  provided  we  recognize  that  this  implies  his 
liability  to  get  negative  interest  as  well  as  positive  interest. 

This  argument  for  the  equity  of  interest,  it  will  be  perceived,  rests 
upon  the  same  basis  as  that  by  which  we  determined  what  was  an 
approximately  equitable  wage,  to  wit,  that  "justice"  (in  the  sense  of 
payment  to  anyone  in  proportion  to  the  value  of  the  contribution 
which  circumstances  enable  him  to  make)  is  equity.  That  this  is 
absolutely  true,  I  do  not  contend ;  but  that  it  approximates  the  truth 
and  is  sufficiently  near  it  to  afford  us  a  simple  practical  rule  of  expe- 
diency, which  under  a  system  of  equal  access  to  natural  opportunity 
will  work  no  serious  evil  to  anyone,  I  do  contend.  In  a  note  [note  i, 
page  50]  I  have  already  called  attention  to  the  fact,  that,  while  the 
principle  adopted  gives  us  a  formula,  it  does  not  determine  the  exact 
amount  of  the  total  product  which  shall  actually  be  distributed  as 
wages  or  as  interest. 

I  have  but  hinted,  however,  at  the  great  practical  difficulty  in 
determining,  just  how  much  each  unit  has  contributed  to  the  total 
result.  It  is  not  very  difficult  to  determine  how  much  of  the  product 
should  go  for  rent  for  the  land  used,  but  a  serious  question  arises 
when  we  undertake  to  distribute  the  remainder  between  capital  and 
labor,  and  by  far  the  most  difficult  point  of  all  is  to  fix  the  proportion 
which  should  be  observed  in  paying  the  several  grades  of  labor — to 
determine  how  much  is  due  to  the  highly  skilled  labor  of  the  entre- 
preneur and  his  principal  lieutenants,  how  much  to  the  ordinary 
skilled  labor  of  the  artisans,  and  how  much  to  the  comparatively 
unskilled  labor  of  the  lowest  grade  of  workmen.'     I  have  no  disposi- 

^  We  may  note  in  passing  the  common  mistake  of  attributing  everything  to  the 
entrepreneur,  who,  in  reality,  by  doing  his  part  well  simply  enables  the  other  laborers 
to  reap  the  natural  and  fitting  reward  of  their  combined  effort  —  a  result  which  is  pre- 
vented by  incompetence  in  an  entrepreneur,  so  that  those  who  work  under  such  an 
incompetent  manager,  although  they  do  their  share  of  the  work  just  as  well  as  it  can 
be  done,  are  prevented  from  reaping  a  suitable  reward  because  they  have  not  the 
cooperation  of  competent  entrepreneur  activity.  We  may  see  this  more  clearly,  per- 
haps, by  taking  the  opposite  case,  in  which  a  capable  entrepreneur  is  unable  to  reap 


50  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

tion  to  blink  this  difficulty.  On  the  contrary,  I  freely  admit  that  it 
seems  to  me  quite  impossible  to  determine  with  perfect  accuracy  how 
the  distribution  should  be  made  in  order  to  do  what  is  exactly  right. 
But  perhaps  we  may  do  something  to  bring  about  a  condition  of 
affairs  in  which  the  tithing  of  mint,  anise,  and  cummin  will  not  be  so 
vital  a  matter  as  it  is  today.  I  mean  that  it  is  possible  that  we  may  so 
raise  the  minimum  wage  that  it  shall  no  longer  be  (as  it  so  often  is  at 
present)  a  matter  of  life  or  death  whether  a  man  gets  the  full  wage 
current  for  his  class  of  labor. 

I  hope  to  show  that  whereas  there  is  nothing  to  determine  the  rate 
of  interest  except  the  relation  of  capital  to  labor  and  to  land,  and 
whereas  there  is  a  distinct  and  positive  element  in  the  determination 
of  wages  —  to  wit,  the  standard  of  living — we  can  by  raising  the 
standard  of  living  ensure  that  the  portion  of  the  product  distributed 
to  the  lower  grades  of  labor  shall  be  great  —  that  is,  we  shall  ensure 
high  wages.  And  that  is  what  we  want,  and  all  that  we  can  reasonably 
expect.  Whether  such  wage  shall  measure  with  perfect  justice  and 
accuracy  the  contribution  of  labor  to  the  product,  as  over  against  the 
contribution  of  land  and  capital,  is  a  question  incapable  of  solution. 
All  the  capital  employed  could  not  give  -us  the  product  in  question 
without  labor ;  and,  on  the  other  hand,  all  the  labor  employed  would 
not  avail  to  give  us  the  product  without  the  capital.  The  increase  in 
the  value  of  the  product  over  the  value  in  isolation  of  the  several  fac- 
tors of  production  is  dependent  upon  the  labor  exerted ;  but  it  is  just 
as  dependent  upon  the  capital  invested.  There  is  a  current  fallacy  to 
the  effect  that  there  is  a  certain  just  distribution  of  the  product's  value, 
regardless  of  the  conditions  under  which  the  factors  actually  entered 
into  combination  in  any  given  case.  Our  business  is  not  to  determine 
any  such  imaginary  norm,  but  to  try  to  bring  about  such  a  condition 
of  affairs  as  shall  allow  of  the  largest  possible  distribution  to  active, 
present,  living  labor ;  as  a  natural  result  of  which  we  may  reasonably 
expect  the  laborers  themselves,  as  a  class,  to  become  capitalists, —  a  con- 
dition which  of  itself  would  go  far  to  destroy  the  hostility  and  jeal- 
ousy between  laborers  and  capitalists. 

the  natural  reward  of  his  skill  and  industry  because  his  fellow  laborers  are  too  igno- 
rant, feeble  and  untrained  to  do  their  share  of  the  work  well.  A  great  general  could 
hardly  win  a  battle  at  the  head  of  an  army  of  untrained  women  and  children ;  and  as 
little  could  brave  and  tried  soldiers  and  experienced  officers  if  the  supreme  command 
were  in  the  hands  of  an  ignorant  child. 


THE  STANDARD  OF  LIVING  5' 


II.  THE  STANDARD  OF  LIVING  THE  KEY  TO  THE  PROB- 
LEM OF  DISTRIBUTION. 

Having  thus  considered  in  a  general  way  what  we  would  regard  as 
equitable,  let  us  turn  to  the  laws  of  rent,  wages  and  interest  for  such 
light  as  they  may  be  able  to  throw  on  the  problem  before  us. 

At  first  glance  it  may  seem  that  in  presenting  these  laws  we  have 
been  reasoning  in  a  circle ;  that  we  have  been  making  interest  depend 
upon  wages  and  rent,  and  wages  depend  on  rent  and  interest,  and 
rent  depend  on*  wages  and  interest.  This  is  in  part  true,  but  the  fact 
is  not  prejudicial  to,  but  confirmatory  of,  the  truth  of  the  propositions 
advanced.  Inasmuch  as  land,  labor  and  capital  are  cooperative  factors 
in  production,  the  share  that  goes  to  the  provider  or  controller  of  each 
is  necessarily  conditioned  by  the  shares  of  the  others,  that  is,  these 
shares  mutually  condition  one  another ;  but  they  are  not  wholly  deter- 
mined the  one  by  the  others.  What  may  be  called  the  negative  ele- 
ment in  the  determination  of  each  is  its  dependence  upon  the  other 
two ;  but  in  the  cases  of  rent  and  wages,  at  least,  there  appears  also  a 
positive  element. 

Before  passing  on,  however,  it  will  be  well  for  us  to  dwell  for  a 
moment  upon  this  reciprocity  of  the  laws  of  rent,  wages  and  interest ; 
for  by  so  doing  we  may  be  enabled  to  do  something  to  dispel  the  vul- 
gar notion  —  drawn  from  a  hasty  glance  at  the  so-called  iron  law  of 
wages,  the  principle  of  competition,  etc. —  that  political  economy  is 
the  science  of  human  helplessness,  that  to  study  political  economy  is 
to  learn  the  impossibility  of  accomplishing  anything  by  voluntary 
human  action  to  improve  social  conditions,  the  assumption  being  that 
economic  laws  are  entirely  independent  of  human  volition.  Now,  in 
the  sense  in  which  this  is  commonly  understood  it  is  quite  false. 
Economic  laws  are  largely  formulations  of  the  effect  of  human  voli- 
tion, and  of  course  depend  for  their  content  upon  human  action.  For 
instance,  the  standard  of  living  is  the  positive  element  in  the  law  of 
wages ;  and,  as  a  consequence  of  the  reciprocity  of  the  laws  of  distribu- 
tion, the  standard  of  living  not  only  affects  wages  but  also  enters  into 
the  determination  of  rent  and  interest.  Hence,  it  is  evident  that 
direct,  conscious,  voluntary  action  with  reference  to  the  standard  of 
living  may  do  much  to  affect  economic  distribution.     The  real  diffi- 


52  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

culty  in  the  way  of  a  more  equitable  distribution  is  rather  in  social 
facts  than  in  economic  laws.  Much  of  this  difficulty  lies  in  the  fact 
that  those  who  suffer  under  the  distribution  which  takes  place  at  the 
present  time  under  economic  law,  neither  know  what  the  conditions 
are  that  make  these  laws  work  evil  upon  them,  nor  have  the  ability  to 
act  in  concert  to  remove  the  evil  conditions.  Take,  for  example,  the 
victims  of  the  "  sweating  system  "  in  our  cities.  Were  they  as  a  class 
more  intelligent  and  better  educated,  they  could  not  be  kept  in  sub- 
jection to  the  conditions  which  now  enslave  them.  Of  course,  it  is  as 
true  that  their  industrial  condition,  their  place  in  the  economic  sys- 
tem of  today,  prevents  them  —  and  has  a  strong  tendency  to  prevent 
their  children  —  from  acquiring  the  ability  and  gaining  the  education 
which  would  enable  them  to  get  out  of  their  miserable  condition,  as  it 
is  that  lack  of  ability  and  education  keep  them  in  this  cellar  of  the 
industrial  system.  What  we  call  "cause"  and  "effect"  so  act  and 
react  upon  one  another  that  it  is  impossible  to  say  which  is  cause  and 
which  effect,  the  truth,  of  course,  being  that  they  are  reciprocally 
cause  and  effect  to  one  another.  What  I  would  emphasize,  by  calling 
attention  to  what  has  just  preceded,  is,  that  while  in  view  of  economic 
laws  there  is  much  in  present  social  conditions  to  make  difficult  the 
amelioration  of  the  condition  of  our  lower  classes,  there  is  nothing  in 
economic  law  as  such  which  prevents  such  amelioration. 

Passing  in  mental  review  the  three  laws  of  distribution,  as  I  have 
presented  them  in  Part  I,  we  see  that  there  is  nothing  characteristic  and 
distinctive  in  the  law  of  interest.  Interest  varies  directly  with  the  pro- 
ductive power  in  combination  of  the  particular  capital  in  question,  and 
inversely  with  wages  and  rent,  just  as  wages  vary  directly  with  such 
power  in  combination  of  labor  and  inversely  with  rent  and  interest, 
and  as  rent  varies  directly  with  such  power  in  combination  of  land  and 
inversely  with  rent  and  interest.  But  in  the  cases  of  rent  and  wages  there 
is  something  more  than  this.  That  which  is  distinctive  in  the  case  of 
rent — that  it  varies  directly  with  the  proportion  between  the  amount 
of  land  at  or  above  the  margin  of  use  that  is  appropriated  by  less  than 
the  whole  number  of  those  who  must  use  it  and  that  is  actually  in 
use,  and  the  whole  amount  of  such  appropriated  land  —  grows  out  of 
the  fixed  and  limited  quantity  of  land  and  depends  upon  its  being  held 
as  private  property.  It  is  conceivable  that  land  should  be  nationalized 
(and  we  have  seen  reason   to  believe  that  it  would  be  well  for  society 


THE  STANDARD  OF  LIVING  53 

if  it  were  so).  This  element  in  the  law  of  rent,  then,  need  not  be 
regarded  as  necessarily  a  permanent  one;  were  land  the  property  of  the 
state,  the  formula  for  rent  might  be  reduced  to  the  same  general  form 
as  that  for  interest.'  But  when  we  come  to  the  law  of  wages,  we  find 
a  distinctive  element,  which  cannot  be  eliminated.  Whether' labor  be 
more  or  less  productive,  you  cannot  obtain  a  stroke  of  the  most  ordi- 
nary, unskilled  labor  unless  you  give  for  it  a  wage  which  accords  with 
the  laborer's  actual  standard  of  living.  The  wage  may  be  much  too  low 
for  the  laborer's  ideal  standard  of  living,  but  it  must  correspond  with  his 
actual  standard.  This  standard  of  living  may  be  high  at  one  time  and 
low  at  another,  and  there  may  be  a  thousand  different  standards  for  as 
many  different  grades  of  labor  ;  but  whether  at  any  given  time  it  be 
high  or  low  for  a  given  class  of  laborers,  the  wages  given  at  that  time 
to  a  laborer  of  that  class  must  correspond  to  it. 

In  the  section  on  wages,  in  the  first  part  of  this  essay,  we  considered 
what  would  happen  in  the  extreme  cases  in  which  it  might  be  physically 
impossible  to  maintain  all  of  the  class  at  the  existing  standard  of  living  ; 
when,  however,  we  consider  actual  conditions,  we  shall  find  the  case 
much  more  favorable  for  the  maintenance  of  a  standard  of  living  once 
reached.  First  and  foremost  is  the  indubitable  fact  of  the  increased 
efficiency  (productiveness)  of  labor  which  accompanies  a  high,  as 
compared  with  a  low,  standard  of  living.''  Entrepreneur  and  capitalist 
cannot  afford  to  diminish  the  productiveness  of  labor  by  lowering  the 
standard  of  living.     On  the  contrary,  it  is  to  their  interest  to  increase 

*  The  Ricardian  principle  of  rent  is  embraced  in  the  formula  "  the  productive 
power  in  combination  of  the  particular  land  in  question." 

*  The  cry  of  the  alarmists  that  population  is  continually  pressing  upon  subsistence, 
and  that  to  considerably  raise  wages  would  be  the  ruin  of  industry  and  the  destruction 
of  our  civilization,  because  if  wages  of  common  labor  were  much  higher  there  would 
not  be  enough  wealth  in  the  world  to  go  around  and  at  the  same  time  maintain  industry 
at  its  present  state  of  efficiency,  is  extremely  short-sighted.  In  the  first  place,  no 
sufficient  evidence  has  ever  been  adduced  of  the  fact  alleged,  although  much  has  been 
made  of  the  difference  between  wealth  that  contributes  to  subsistence  and  other  kinds 
of  wealth.  Now,  it  is  doubtless  true  that  while  other  kinds  of  wealth  have  increased 
indefinitely,  "subsistence-wealth"  (meaning  necessary  food,  clothing,  etc.)  has  not 
increased  in  the  same  proportion,  but  lags  behind,  and  even  at  the  end  of  the  nineteenth 
century  is  hardly  more  than  sufficient  to  maintain  the  present  population.  Certainly  \ 
Why  should  we  have  any  more  subsistence-wealth  than  is  necessary  to  support  our 
population?  Would  it  not  speak  very  ill  for  the  intelligence,  nay,  the  sanity,  of  our 
captains  of  industry,  if  capital  and  labor  were  directed  to  the  production  of  food  for 


54  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

the  efificiency  of  labor  by  raising  the  standard  of  living.  Of  course  I 
am  not  blind  to  the  fact  that,  while  some  of  the  employing  class  recog- 
nize this  in  the  abstract,  few  act  upon  it  in  the  concrete.  But  where 
the  attempt  is  made  to  reduce  wages  so  greatly  as  seriously  to  affect 
the  standard  of  living,'  it  is  often   found   that  after  a  short  time  the 

which  the  present  population  could  find  no  use,  so  that  there  would  be  nothing  for  it 
but  to  rot !  "  But,"  it  is  said,  "  not  only  does  subsistence-  wealth  not  increase  in  quantity 
proportionally  with  other  forms  of  wealth  ;  but  the  price  of  such  subsistence-wealth 
does  increase  very  greatly  relatively  to  the  price  of  other  kinds  of  wealth,  showing 
that  it  is  increasingly  difficult  to  obtain."  Showing  nothing  of  the  kind.  Granting 
the  fact,  it  seems  to  me  that  a  very  different  and  a  very  simple  interpretation  should 
be  put  upon  it.  To  say  that  the  value  of  subsistence-wealth  increases  relatively  to 
that  of  other  kinds  of  wealth,  is  but  another  way  of  saying  that  the  value  of  other 
kinds  of  wealth  diminishes  relatively  to  that  of  subsistence-wealth.  The  use  of  the 
term  "  subsistence-wealth  "  with  which  we  are  now  dealing  implies  that  the  wealth 
embraced  under  that  head  consists  of  necessaries,  and  it  also  implies  that  all  other 
kinds  of  wealth,  not  included  under  the  term  "subsistence-wealth,"  are  non-necessaries. 
Now  there  are  two  elements  which  enter  into  the  determination  of  the  value  of  a  thing, 
its  utility  and  its  difficulty  of  attainment;  and  I  believe  that  the  weight  of  economic 
opinion  holds  that  the  former  is  on  the  whole  the  more  important  element.  Applying 
this  to  the  matter  in  hand,  we  readily  see  why  the  value  of  subsistence-wealth  increases 
as  compared  with  all  other  kinds  of  wealth.  Not  because  it  is  more  difficult  of  attain- 
ment, but  because  it  has  more  utility.  Other  things  (such  as  difficulty  of  attainment) 
being  equal,  necessaries  must  always  be  more  valuable  than  non-necessaries.  But  in  a 
primitive  condition  of  society,  when  there  is  little  else  than  subsistence-wealth,  a 
scarcity  of  other  kinds  of  wealth  gives  them  a  relatively  high  value.  As  the  produc- 
tive power  of  society  increases  with  advancing  civilization,  however,  an  ever  increas- 
ing amount  of  this  productive  power  is  released  from  the  production  of  necessaries 
(subsistence-wealth)  and  is  free  to  produce  non-necessaries.  As  the  quantity  of  these 
non-necessaries  constantly  increases  relatively  to  the  population,  their  value  steadily 
falls,  as  compared  with  that  of  the  necessaries  included  under  the  head  of  subsistence- 
wealth;  but  if  I  may  be  allowed  to  perpetrate  a  seeming  bull,  this  is  not  because  sub- 
sistence-wealth is  more  difficult  to  obtain  (than  it  was  or  than  other  kinds  of  wealth  are), 
but  because  other  kinds  of  wealth  are  easier  to  obtain  (than  they  were). 

Now,  not  only  have  the  alarmists  failed  to  show  that  population  is  pressing  upon 
subsistence,,  in  the  sense  in  which  they  must  be  understood  to  use  the  expression,  but 
in  addition  to  this  unsubstantiated  premise  their  argument  proceeds  upon  the  farther 
assumption  that  if  the  lowest  class  of  laborers  were  given  higher  wages  and  their 
standard  of  living  were  raised,  they  would  produce  no  more  —  perhaps,  on  account 
of  shorter  hours  of  labor,  less  —  than  at  present,  which  assumption  is  contrary  to  the 
experience  of  the  race,  and  to  the  opinions  of  almost  all  economists.  Raise  the 
standard  of  living  of  the  laborer,  by  raising  his  wages,  and  you  increase  his  productive 
power. 

*  We  must  remember  that  where  the  standard  of  living  is  reasonably  high,  not 


THE  STANDARD  OF  LIVING  55 

members  of  the  inferior  class  who  take  the  places  of  the  class  having 
the  higher  standard  of  living,  and  the  weaker  members  of  the  latter 
class  who  accept  the  reduction,  are  discharged  to  make  room  for  the 
old  men  who  have  stood  out  for  the  higher  standard  ;  or  else  these 
cheaper  men  who  have  replaced  them,  themselves,  successfully  strike 
for  the  higher  wage,  and  thus  adopt  the  same  standard  of  living  that 
was  maintained  by  those  whom  they  had  displaced.  But  not  only  has 
the  increased  efficiency  of  the  class  of  labor  which  has  a  high  standard 
of  living,  a  tendency  to  maintain  the  standard  because  the  labor  is 
more  productive  than  it  would  be  at  a  lower  standard  of  living  ;  it  is 
also  true  that  the  high  standard  of  living  has  a  tendency  to  perpetuate 
itself  because  the  laborers  who  enjoy  it  are  better  able  to  protect  their 
interests  in  all  respects.  Being  abler,  richer  and  more  intelligent  than 
they  would  be  under  a  low  standard  of  living,  they  are  more  formidable 
antagonists  in  a  labor  contest,  and  by  means  of  cooperation  through 
trades  unions,  strikes,  etc.,  they  can  frequently  bring  their  employers 
to  terms,  particularly  as  the  high  degree  of  the  efficiency  of  their  labor, 
already  referred  to,  makes  it  difficult  to  supply  their  places. 

In  what  has  just  "preceded  we  have  seen  how  the  standard  of  living 
exerts  a  controlling  influence  upon  labor,  and  it  is  not  difficult  to 
show  how  it  also  affects  rent  and  wages. 

Supposing  the  case  in  which,  by  reason  of  its  private  appropria- 
tion, even  the  poorest  land  in  use  commands  a  rent,  it  is  obvious  that 
the  maximum  to  which  competition  on  the  part  of  the  land  users  and 
combination  on  the  part  of  the  landlords  can  raise  this  rent  is  limited 
by  the  standard  of  living.  Of  course,  if  the  landlord's  actual  physical 
power  corresponded  to  their  "legal  right,"  they  might  combine  and 
by  standing  out  for  a  high  rent  reduce  the  laborers  to  a  standard  of 
living  which  should  be  at  the  minimum  point  of  subsistence,  or  else, 
by  refusing  them  access  to  land,  starve  them  to  death.  But  this  is  a 
purely  hypothetical  case.  In  fact  the  landlords'  physical  power  never 
is  equal  to  their  nominal  rights ;  and  as  the  size  of  their  income 
depends  upon  the  use  made  of  their  land,  and  as  there  is  not  an  effec- 

every  slight  diminution  of  wages  should  be  regarded  as  considerably  affecting  it. 
And,  furthermore,  it  must  be  remembered  that,  notably  in  some  lines  of  work,  and 
more  or  less  in  all  fields  of  labor,  the  rate  of  wages  is  subject  to  frequent  change  from 
season  to  season,  being  now  a  little  higher  and  now  a  little  lower  than  its  mean  aver- 
age; in  such  cases,  it  is  not  the  wages  received  at  any  given  time,  but  the  mean  aver- 
age, which  must  correspond  to  the  standard  of  living. 


56  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

tive  demand  for  all  the  land,  and  as  there  is  competition  among  the 
landlords,  the  laborers  are  generally  able  to  maintain  their  standard 
of  living,  against  the  landlords,  above  the  point  of  mere  subsistence. 
But  whether  the  standard  be  high  or  low,  it  is  evident  that  the  laborer 
will  not  pay  any  rent  until  he  has  first  secured  himself  a  wage  correr 
sponding  to  that  standard.  Of  course,  were  private  property  in  land 
done  away  with  we  should  then  have  nothing  but  marginal  rent  to 
deal  with ;  and  the  current  definitions  of  the  margin  of  cultivation 
make  sufficiently  evident  that  the  margin  from  which  rent  is  reckoned 
is  determined  by  the  standard  of  living. 

Now  as  to  interest.  In  the  absence  of  any  distinctive  element  to 
determine  interest,  —  as  the  quantity  of  capital  is  not  fixed,  as  is  that 
of  land,  and  as  there  is  no  standard  of  living  for  capital,  as  there  is  for 
labor,  —  it  becomes  evident  that  the  amount  of  (true)  interest  which 
capital  is  to  receive  is  determined  by  the  amount  of  the  total  product 
that  must  go  as  rent  and  wages ;  and  as  we  have  shown  that  wages  and 
rent  can  be  controlled  by  the  standard  of  living,  it  follows  that  the 
standard  of  living  can  also  control  interest. 

Our  conclusion  is,  therefore,  that  the  Standard  of  Living  is  the  cen- 
tral and  controlling  factor  in  economic  distribution. 

From  this  it  follows  that  if  we  can  do  anything  to  raise  the  standard 
of  living  and  maintain  it  at  a  high  level,^  we  shall  attain  our  object  of 
effecting  a  more  equitable  distribution  of  wealth  —  and  not  only  so, 
but  we  shall  also  increase  the  wealth-producing  power  of  society, 
because  of  the  superior  productiveness  of  the  labor  of  those  whose 
standard  of  living  is  high. 

'  Aside  from  what  can  be  done  by  voluntary  action,  a  word  or  two  as  to  the  effect 
upon  the  standard  of  living  of  economic  changes  brought  about  in  the  natural  order 
of  industry  without  any  thought  as  to  the  effect  upon  the  standard  of  living,  will  not 
be  out  of  place.  The  social  and  economic  conditions  of  the  moment  determine  the 
effect  of  improvements  in  the  arts  (or  of  increase  in  population)  upon  the  standard 
of  living.  If  an  invention  calls  for  a  new  form  of  industry,  high  wages  will  probably 
be  offered  to  attract  men  to  it,  and  wages  in  other  kinds  of  industry  may  be  raised  to 
keep  the  laborers  at  their  former  work.  This  increased  wage  will  probably  raise  the 
standard  of  living.  But  if  the  improvement  is  of  such  a  character  as  to  enable  much 
less  labor  to  do  work  formerly  done,  the  increase  will  probably  go,  not  to  labor,  but  to 
capital  and  land,  the  standard  of  living  not  being  improved.  The  effect  on  labor  in 
this  case  will  probably  be  that  some  of  the  laborers  formerly  doing  the  kind  of  work 
now  done  by  the  machine  will  be  thrown  out  of  work,  there  will  be  much  immediate 
suffering,  and  the  number  of  young  men  who  would  have  gone  into  that  kind  of  work 


LAND  NATIONALIZATION  57 


III.  LAND  NATIONALIZATION  ECONOMICALLY  JUSTIFIED 
AS  A  MEANS  OF  RAISING  THE  STANDARD  OF  LIV- 
ING AND  EFFECTING  A  MORE  EQUITABLE  DISTRI- 
BUTION. 

We  may  state  as  the  result  of  what  has  preceded  that,  if  the  eco- 
nomic premises  set  forth  in  the  first  part  of  this  essay  be  sound,  social 
action  directed  to  the  elevation  of  the  standard  of  living  is  in  harmony 
with  economic  principles,  and  that  from  the  standpoint  of  economic 
theory  such  procedure  would  be  a  very  effective  way  to  bring  about  a 
more  equitable  distribution  of  wealth.  But  we  have  also  seen  that  the 
nationalization  of  land  by  its  direct  effect  in  equalizing  opportunity 
would  tend  to  bring  about  a  more  equitable  distribution  of  wealth. 
If,  therefore,  it  can  be  shown  that  land  nationalization  would  have  a 
tendency  to  raise  the  standard  of  living,  this  warmly  advocated  and 
hotly  denounced  reform  would  stand  upon  strong  economic  ground. 

In  support  of  this  last  hypothesis  it  may  be  argued  that  land 
nationalization  would  have  a  tendency  to  raise  both  wages  and  inter- 
est, not  alone  by  eliminating  that  portion  of  rent  which  under  a 
regime  of  private  ownership  may  be  paid  for  the  poorest  land  in  use 
(but  which  General  Walker  and  "orthodox"  economists  generally 
regard  as  inconsiderable),  but  also  by  wiping  out  that  very  consider- 
able increase  in  rent  which  is  due  to  the  speculation  in  land.'     Thus 

will  be  diminished.  But  the  goods  produced  by  the  new  machinery  will  be  sold  at 
a  lower  price  than  when  they  were  more  largely  handmade,  by  reason  of  the  endeavor 
of  those  who  first  adopt  the  machinery  to  increase  their  market  at  the  expense  of 
those  who  still  retain  the  older  method  ;  and  this  lowering  of  the  price  will  tend  to 
increase  the  demand  so  that  the  number  of  men  employed  in  the  industry  may  soon 
be  as  great  as  ever,  and  their  standard  of  living  as  high  as  ever.  We  should  also 
remember  in  this  connection  that  the  effect  of  lowering  the  price  of  any  commodity, 
other  things  being  equal,  will  naturally  be  to  raise  the  standard  of  living  of  con- 
sumers, as  such.  All  this  is  upon  the  assumption  that  to  increase  wages  is  to  raise 
the  standard  of  living.  But  of  course  a  sudden,  considerable  increase  of  wages  from 
a  low  standard  may,  and  probably  will,  have  more  influence  to  increase  the  popula- 
tion than  to  raise  the  standard  of  living.  On  the  other  hand,  a  slow,  gradual  increase 
in  wages,  or  an  increase  from  a  fairly  high  standard,  will  have  more  influence  to  raise 
the  standard  of  living  and  may  not  at  all  increase  the  rate  of  propagation. 

^  If,  for  instance,  all  the  land  on  Manhattan  Island  could  be  profitably  used  today 
at  an  average  rental  per  lot  of  j^iooo  per  annum  for  a  fairly  long  term,  or  could  be 


58  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

the  share  of  labor  (and  of  capital)  in  distribution  would  be  increased, 
and  this  would  have  a  tendency  to  raise  the  standard  of  living.  But, 
further  than  this,  if  all  rent  went  to  the  state,  its  revenue  from  this 
source  would  be  so  great  that  it  could  remit  a  great  part,  if  not  the 
whole,  of  the  heavy  taxation  levied  upon  its  citizens  in  the  various  forms 
of  direct  and  indirect  taxation  which  now  prevail.  This  again  would 
increase  the  available  income  of  all  citizens  (except  landlords),  and  would 
certainly  tend  to  raise  the  standard  of  living.  That  the  reform  under 
discussion  would  effect  this  much  I  suppose  no  one  would  question.  In 
fact,  it  is  generally  claimed  by  advocates  of  the  ''  Single  Tax,"  that  the 
public  revenue  from  land  would  be  sufficient  to  meet  all  the  present 
needs  of  government  and  leave  a  surplus  ;  so  that  all  taxation  could 
be  abolished  save  ''the  single  tax,"  and  there  would  then  be  sufficient 
revenue  to  justify  large  public  expenditures  for  education  and  for 
parks  and  pleasure  grounds,  art  galleries,  libraries,  municipal  water- 
works, municipal  light  and  heat  plants,  etc.  If  but  half  of  this  be 
true,  here  would  be  another,  a  direct  means  of  raising  the  standard  of 
living.  And  as  to  all  of  this  it  should  be  remembered  that  by  raising 
the  standard  of  living  the  efficiency  of  labor  would  be  increased,  and 
the  increased  productivity  of  industry  would  be  an  additional  source  of 
larger  wages  and  thus  of  a  still  higher  standard  of  living.  Another 
way  in  which  land  nationalization,  effected  by  the  Single  Tax  and  the 
abolition  of  all  other  taxes,  would  tend  to  increase  wages  and  raise  the 
standard  of  living,  is  that  it  would  substitute  a  premium  upon  industry 
and  productivity  for  the  heavy  tax  levied  upon  it  at  present.  Now  the 
improved  farm  or  lot  is  taxed  heavily,  while  the  unimproved  escapes 
with  a  light  tax.  The  shiftless  farmer,  whose  land  is  in  poor  condi- 
tion and  whose  buildings  are  few  and  mean,  is  taxed  very  lightly;  but 
if  he  should  erect  a  fine  barn,  repair  his  fences  and  make  his  farm 
really  valuable,  he  would  be  taxed  heavily  for  it.     Under  the  Single 

sold  at  a  corresponding  price  ;  but  a  third  of  it  is  held  back  for  a  rise  in  value,  because 
its  owners  are  confident  that  in  a  rapidly  growing  metropolis  like  New  York  a  much 
larger  rental  and  larger  selling  price  than  are  now  current  can  soon  be  obtained,  and 
they  will  therefore  not  sell  or  let  their  land  except  upon  very  short  leases,  the  result 
will  be  that  the  land  which  can  be  bought  or  obtained  upon  leases  of  reasonable 
length  will  command  an  average  rental  considerably  greater  than  ^looo,  perhaps 
$1400,  and  a  correspondingly  large  selling  price.  This  increased  tax  which  specula- 
tive dealing  in  land  now  levies  upon  labor  and  capital  would  be  done  away  with  by 
the  nationalization  of  the  land. 


LAND  NATIONALIZATION  -«««=^-  ^^ 

Tax,  on  the  contrary,  the  shiftless  farmer  or  the  owner  of  a  vacant  lot 
would  have  to  pay  as  much  rent  as  the  thrifty  farmer  or  the  lot  owner 
whose  land  is  built  upon ;  it  would,  therefore,  be  to  the  interest  of  all 
to  make  the  fullest  use  of  whatever  land  they  held,  and  this  would 
increase  productive  industry  and,  by  greatly  increasing  the  demand 
for  labor  (as  well  as  for  capital),  would  have  a  further  tendency  to  raise 
w2Cges,  and  thus,  of  course,  to  raise  the  standard  of  living. 

Here,  then,  we  have,  so  far  as  fundamental  economic  principles  are 
concerned,  firm  ground  for  supporting  land  nationalization  as  a  social 
reajudstment  admirably  adapted  to  effect  a  more  equitable  distribution 
of  wealth.  And  with  this  result  we  should  be  satisfied,  as  it  accom- 
plishes the  purpose  with  which  we  set  out  —  an  exposition  in  outline  of 
the  relation  of  certain  economic  principles  to  social  readjustment  — 
a  purpose  which  was  more  specifically  expressed  as  "an  inquiry  into 
the  general  principles  of  production  and  distribution  and  the  nature  of 
value,  with  a  view  to  ascertain  the  possibility  of  effecting  by  social 
action  a  more  equitable  distribution  of  wealth  than  now  prevails."  We 
have  shown  that  conscious  social  readjustment  does  no  violence  to,  but  is 
in  accord  with  and  /v  supported  by  fundamental  economic  principles,  and 
we  have  illustrated  this  general  truth  by  reference  to  a  specific  plan  of 
social  readjustment — land  nationalization. 

Before  concluding  the  essay,  however,  it  may  be  well  to  caution  the 
reader  that  in  directing  attention  to  land  nationalization  the  writer  has 
had  no  intention  of  suggesting  that  in  it  we  have  a  complete  programme 
of  social  readjustment.  It  is  used  in  this  essay  merely  as  a  case  of 
radical  social  readjustment  which  has  the  full  support  of  economic 
theory  (as  the  writer  conceives  such  theory).  Personally,  the  writer 
regards  it  as  the  most  important  reform  now  before  the  public,  and  he 
believes  that  it  is  not  only  supported  by  abstract  economic  principles, 
but  also  by  such  social  considerations  as  have  reference  to  the  present 
practicability  of  inaugurating  it.  The  discussion  of  these  latter  consid- 
erations, however,  dodpnot  fall  within  the  scope  of  this  treatise,  and 
the  writer  therefore  contents  himself  with  suggesting  in  a  note^  the 
line  of  argument  that  he  would  follow  in  such  a  discussion. 

^  First.  As  to  the  difficulties  in  the  way  of  carrying  the  reform  into  effect,  I 
believe  that  the  desired  end  can  be  obtained  by  such  a  gradual  approach  as  shall  not 
even  temporarily  do  any  considerable  injury  to  any  class  of  the  community,  land-own- 
ing or  landless,  while  effecting  an  immense  improvement  in  the  condition  of  the  peo- 


6o  ECONOMIC  PRINCIPLES  AND  SOCIAL  READJUSTMENT 

pie  as  a  whole,  and  particularly  in  that  of  the  lowest  class  of  laborers.  But  I  feel 
bound  to  state  my  conviction  that,  even  if  it  were  necessary  for  the  public  good  to  take 
from  a  few  men,  who  with  the  earnings  of  their  labor  had  purchased  it,  that  which  the 
state  by  its  acquiescence  had  encouraged  them  to  regard  as  a  legitimate  subject  of 
private  property,  yet  to  refrain  from  restoring  to  millions  the  equal  right  of  access  which 
all  men  should  have  to  land  —  the  source  of  all  wealth,  and  the  condition  and  oppor- 
tunity of  all  labor  —  because  a  few  thousands  would  thereby  be  so  far  injured  as  to  be 
reduced  to  something  like  as  bad  a  position  as  these  millions  would  be  in  after  the 
restoration  of  their  rights,  would  in  my  opinion  be  a  travesty  of  justice.  It  is  not  to 
be  expected  that  finite  man  shall  achieve  perfect  justice,  or  ideal  perfection  in  any- 
thing. The  most  that  we  can  do,  as  a  rule,  is  to  adopt  the  least  of  alternative  evils. 
And  I  hold  that  the  evil  of  expropriating  the  few  thousand  proprietors  who  have  pur- 
chased their  land  with  the  fruits  of  their  own  individual  labor  (the  only  class  whose 
rights  are  real  enough  to  deserve  much  consideration  in  a  case  like  this),*  is  much  less 
than  the  evil  of  keeping  out  of  their  rights  the  millions  of  landless  men  who  suffer 
under  the  present  system.  It  is  true,  I  should  be  very  sorry  to  be  forced  to  such  an 
alternative ;  but  in  case  I  were,  my  decision  would  be  that  just  indicated.  As  I  have 
said,  however,  I  see  no  necessity  for  extreme  measures.  So  far  as  I  am  informed,  the 
capitalized  value,  or  selling  price,  of  land  in  the  United  States  ranges  generally  from 
ten  to  twenty  times  the  annual  rental.  It  does  not  matter  what  the  actual  figure  is ; 
but  for  the  purpose  of  illustration  I  will  assume  that  twenty  times  its  annual  rental  is  the 
selling  price,  or  "  value  "  of  land.  Upon  this  basis,  a  tax  upon  land  values  beginning 
with  a  fraction  of  i  per  cent,  of  the  capitalized  value,  or,  better,  with  a  small  percent- 
age of  the  annual  rental,  and  gradually  increased  during  a  sufficient  period  of  years, 
say  thirty,  until  it  should  cover  the  whole  annual  rental,  would  enable  proprietors  to 
get  back  the  money  they  had  invested,  and  to  accommodate  themselves  gradually  to 
the  new  order  of  things  —  and  at  the  end  of  the  period  disinherited  mankind,  in  the 
person  of  its  trustee,  the  state,  would  be  restored  to  its  rights.  This  is  one  of  a  num- 
ber of  ways  of  approaching  the  subject,  which  might  be  suggested.  Another  is  that 
all.  land  in  the  hands  of  private  proprietors  on  a  given  date  should,  at  their  death, 
pass  to  the  state,  adequate  provision  being  made  for  the  maintenance  of  widows  and 
minor  orphans  of  such  proprieters  in  case  they  should  be  otherwise  unprovided  for. 
As  to  the  practical  difficulties  of  assessment  of  land  values  and  of  collection  and 
administration  of  the  rent,  they  are  not  very  serious.  The  method  of  assessing  land 
and  improvements  separately  is  not  a  new  thing,  but  has  been  practiced  in  the  recent 
past.  There  would  be  need  of  fewer  government  officers  under  the  single  tax  than  at 
present ;  and  as  a  method  of  taxation  it  is  widely  admitted  to  be  more  nearly  in 
accord  with  the  approved  canons  than  any  other  that  has  been  suggested.     It  should 

I  Says  the  writer  on  "  Land"  in  the  Encyclopcedia  Britannica:  "Nor  is  there  any  theory  of 
the  basis  of  property  which  does  not  tacitly  admit  that  it  is  subject  to  the  authority  of  the  community.  If 
derived  from  occupation  it  owes  its  title  to  the  agreement  of  the  community  to  support  that  title.  // 
derived  from  labor,  it  is  valid  only  for  the  life  of  the  laborer,  and  whoever  succeeds  to  hint 
must  take  it,  not  as  a  gift  from  a  dead  man,  whose  rights  end  with  the  grave,  but  as  a  gift 
from  the  state,  which  deems  that  there  is  advantage  in  encouraging  labor  by  the  certainty  of  transmit- 
ting its  produce.  In  every  view  it  must  be  admitted  that  the  state,  by  whose  regulations  and  force  prop- 
erty is  maintained,  must  have  an  unqualified  right  to  prescribe  the  conditions  under  which  it  will  confer 
its  gifts  on  private  individuals." — (Vol.  XIV,,  p.  266.) 


LAND  NATIONALIZATION  6 1 

be  remembered  that  while  the  revenue  to  be  handled  by  government  officers  under 
this  system  might  be  somewhat  greater  than  at  present,  the  difference  would  not  be 
extraordinary,  and  the  publicity  of  the  whole  business,  including  the  amount  of  rev- 
enue, would  be  a  safeguard  against  fraud  and  corruption. 

Second.  As  to  the  objection  that,  although  the  nationalization  of  land  would 
greatly  increase  the  amount  to  be  divided  between  labor  and  capital,  yet  capital 
might  chiefly  benefit  by  the  change  and  get  what  rent  loses ;  my  answer  is  that  there 
is  nothing  to  show  that  capital  would  thus  profit  at  the  expense  of  labor,  and  there  are 
several  reasons  why  it  should  not.  We  have  already  seen  that  the  standard  of  living 
necessitates  the  payment  of  a  wage  corresponding  to  such  standard,  which  takes  prece- 
dence of  interest.  In  the  next  place,  most  of  the  unfair  advantages  at  present  currently 
attributed  to  the  capitalist  do  not  belong  to  him  as  capitalist,  but  as  employer,  in 
which  office  he  often  combines  the  functions  of  entrepreneur  (highly  skilled  labor), 
capitalist,  and  landlord —  a  triple  capacity  which  naturally  gives  him  great  advan- 
tages, in  which  he  wields  an  enormous  influence,  and  from  which  he  derives  a  large 
income.  Where  the  capitalist  has  a  great  and  seemingly  unfair  advantage,  it  will  on 
examination,  I  think,  be  generally  found  that  it  is  because  the  landlord  is  behind  him. 
Make  land  common  property  (/.  <?.,  the  property  of  the  state,  to  be  rented  to  anyone 
who  will  pay  to  society  the  fair  value  of  its  use),  and  even  the  largest  capitalist  could 
do  little  against  the  public  interest.  In  such  case  we  would  not  have  to  fear  large  for- 
tunes ;  for,  as  long  as  the  inexhaustible  source  of  all  goods,  the  perennial  fountain 
whence  all  wealth  comes,  is  equally  free  to  all,  no  harm  is  done  by  the  fact  that  the 
strong  man  carries  off  a  hogshead  while  his  weak  brethren  get  but  a  pailful  apiece  — 
there  is  plenty  of  water ;  the  only  reason  the  weaker  men  have  but  a  pailful  is  that 
they  cannot  carry  any  more  ;  when  they  need  more  they  can  come  back  and  get  it ; 
the  fountain  continues  to  flow.  Now  men  are  not  free  to  labor,  except  by  the  permis- 
sion of  the  landlords,  and  they  must  generally  go  to  the  capitalist  to  get  this  from  them. 
But  if  men  were  free  to  work  for  themselves  by  going  directly  to  the  land  (not  buying 
the  land,  but  merely  paying  an  annual  rental)  if  the  capitalist's  terms  should  not  suit 
them,  the  latter  would  be  more  amenable  to  reason,  and  this  fact  would  tend  to  raise 
wages.  The  capitalist  would  not  hold  the  land  against  the  would-be  laborer,  as  no 
one  could  afford  to  hold  land  without  making  the  fullest  use  of  it ;  and  this  would 
mean  a  large  employment  of  labor,  for  the  landholder  would  have  to  pay  full  rental 
value  of  the  land  whether  he  used  it  or  not,  and  this  would  soon  bankrupt  even  a  rich 
capitalist  who  should  attempt  to  hold  land  out  of  use. 

For  a  further  discussion  of  this  subject,  see  the  syllabus  of  my  sixth  lecture 
(Land  Nationalization)  in  the  series  entitled  "  Projects  of  Political  and  Economic 
Reform"  (Syllabus  No.  loi.  University  of  Chicago  Press,  1896). 


WORKS  QUOTED  OR  SPECIALLY  REFERRED  TO  IN  THE 
FOREGOING  DISSERTATION. 

A  History  of  Political  Economy ,  by  J.  K.  Ingram.    New  York  :  Macmillan  & 

Co.,  1888. 
Introduction  to  the  Study  of  Political  Economy,  Luigi  Cossa.   London  and  New 

York:  Macmillan  &  Co.,  1893. 
The  Scope  and  Method  of  Political  Economy,  J.  N.  Keynes.     London  :  Mac- 
millan &  Co.,  i8qi. 
The  Character  and  Logical  Method  of  Political  Economy,  J.  E.  Cairnes.    New 

York  :  Harper  &  Bros.,  1875  (2d  ed.). 
Some  Leading  Principles   of  Political  Economy   Newly   Expounded,  J.   E. 

Cairnes.     New  York  :  Harper  &  Bros.,  1874. 
Principles  of  Political  Economy,  Charles  Gide.     Boston  :  D.  C.  Heath  &  Co., 

1892. 
The  Working  Principles  of  Political  Economy,  S.  M.  Macvane.     New  York  : 

Maynard,  Merrill  &  Co.,  1893. 
Principles  of  Economics,  Vol.  I,  Alfred  Marshall.     London  and  New  York : 

Macmillan  &  Co.,  1891  (2d  ed.). 
Principles  of  Political  Economy,  Vol.  I,  J.  Shields  Nicholson.     New  York  and 

London  :  Macmillan  &  Co.,  1893. 
Principles  of  Political  Economy,  John  Stewart   Mill.     Abridged  with   Notes, 

etc.,  by  J.  Laurence  Laughlin.     New  York  :  D.  Appleton  &  Co.,  1893. 
Political  Econo?ny,  Francis  A.  Walker.    New  York  :  Henry  Holt  &  Co.,  1888 

(3d  ed.). 
The  Wages  Question,  Francis  A.  Walker.     New  York  :  Henry   Holt   &   Co., 

1891. 
Land  a7id  its  Rent,  Francis  A.  Walker.     Boston:    Little,  Brown  &  Co.,  1883. 
Progress  and  Poverty,  Henry  George.     New  York  ;  Chas.  L.  Webster  &  Co., 

1893. 
Capital  and  Interest,  E.  von  Bohm-Bawerk.     London  and  New  York  :  Mac- 
millan &  Co.,  1890. 
Positive  Theory  of  Capital,  E.  von  Bohm-Bawerk.     London  and  New  York  : 

Macmillan  &  Co.,  1891. 

63 


64  WORKS  QUOTED  OR  REFERRED  TO 

The  Ultimate  Standard  of  Value,  in  Annals  of  the  A7?ierican  Academy  of 
Political  and  Social  Science,  Vol.  V,  No.  2  (September  1894),  Phila- 
delphia, E.  von  Bohm-Bawerk. 

An  Introduction  to  Political  Economy,  An\ivir  Latham  Perry.     New  York: 

Chas.  Scribner's  Sons,  1891. 
Interest  and  Profits,  A.  T.  Hadley.     Philadelphia  :  Am.  Acad,  of  Pol.  and 

Soc.  Sci.,  No.  103. 
Introduction  to  the  Theory  of  Value,  William  Smart.     London  &  New  York  : 

Macmillan  &  Co.,  1891. 
The  History  of  the  General  Doctrine  of  Rent  in  German  Economics.     C.  W. 

Macfarlane.     Leipzig:  Gustav  Fock,  1893. 
Capital:  A  Critical  Analysis  of  Capitalist  Production,  KdiVlMdiryi.  (Translated 

from   3d   German  ed.).     London:    Swan,  Sonnenschein   &   Co.,  1894 

(4th  ed.). 
The  Concept  of  Marginal  Rent,  J.  H.  Hollander.     In  the  Quarterly  fournal 

of  Economics,  Vol.  IX,  No.  2  (January  1895).     Published  for  Harvard 

University,  Boston. 


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